Will spike in financial market volatility lead to a Sept FOMC cut?

LAST week, the US Federal Reserve lowered its short-term interest rates for the first time since 2008. It was a reversal from the position early this year when expectations of a strong US economy led analysts to try and forecast the number of times the Fed would hike its short-term rates; instead, the end-July rate cut has prompted debate on whether it spells the start of a prolonged lowering cycle.

As far as the Fed is concerned, the answer is a tentative no - this much can be gleaned from Fed chairman Jerome Powell's statement that it was a "mid-cycle'' adjustment. Meanwhile, markets are sceptical, and there are bets that there will be more easing in the months ahead - as at the end of last week, the futures market was pricing in a 65 per cent chance of another cut in September.

The reason for the July rate cut is concern over the state of not just the US economy but also the rest of the world, since the Fed knows that its policy stance will be closely watched - and likely followed - by other major central banks. One major source of concern is US-China trade, where there has also been a reversal of the position as at end-February. At that time, US President Donald Trump tweeted that "substantial progress" had been made in talks between the two countries, and that the US would delay increasing tariffs on China that were due to take effect on March 1.