US Federal Reserve lowered its policy rate by 25bp on its July meeting.

Short Comment

Jerome Powell, Chairman of the institution, announced that the institution lowered Federal Funds Rate by 25bp. Two main grounds for the down were worsening economic indices in Europe, Japan, China, and other EM countries, and sluggish inflation in everywhere. He emphasized that the down is a sort of insurance for coming recession. Main consensus among market participants was the down of 25bp. The other point in the statement was that the institution will end its Quantitative Tightening earlier than expected.

Following messages disappointed the participants. S&P500 went down by 1.09%. Even though the messages did not eliminate the possibility of the additional down, the degree of being dovish was estimated as weaker than expected. Main consensus at this point about the institution's policy is to lower the rate by 25bp again on September or October, and freeze it on December.

In fact, I think that there will be no additional down in this year. Even though market participants are ignoring it, the markets are still having the full liquidity with more than $4tn balance sheets of US Federal Reserve. Stopping Quantitative Tightening will preserve the liquidity intact. We need to consider proceeding provision from European Central Bank and Bank of Japan too.

The US Fed know that its capacity to provide additional liquidity to the markets directly could be the last resort it could take if the concern for the recession was realized. Mr. Powell knows it very well. Using the measure early could delay the recession to come up, but could not block it from happening.

Yield of 10year US treasury is around 2%, targeting 2012's level. Considering regional inflation around 1.5%, the real yield of the security is 0.4-0.6% which is the lowest range in the history. Besides, market interest rates in major markets including Japan, Germany and France are lower than 0% already. However, economic indices in the regions except the US are disappointing the participants, and economists are worrying about the recession raiding the world economy. Just additional down could not encourage the participants to increase their investment and consumption enough to block the recession from happening. Decreasing policy rate sharply could be one of the strongest measures with providing the liquidity to the market directly for the central bank when the recession comes up. It need to be careful to use the measure earlier.

I believe that Mr. Powell and Mr. Draghi are showing prudence in being dovish radically because they know the situation very well. In fact, Mr. Powell would not need to lower the policy rate even on the July meeting, considering the best indices in the region. In the US, economic growth was 2.1% for second quarter, unemployment rate still is 3% level, and manufacturing indices are going beyond the participants' expectation. He knew it very well, so emphasized the down was a kind of insurance.

In video games, we often save the single use strongest weapons until we meet the last boss. We cannot use the last resorts to some peewee monsters. The institution needs to save its weapons for the case. The last boss still has enough time to come up.