Fed cuts rates for first time since financial crisis

Fed cuts rates for first time since financial crisis

The Federal Reserve has cut its main interest rate by 25 basis points, the first reduction since the financial crisis, and signalled that it was prepared to ease monetary policy further if necessary.

In its policy statement, the US central bank suggested the monetary easing was justified by “uncertainties” stemming from weakness in the global economy and simmering trade tensions.

“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower the target range for the federal funds rate to 2-2.25 per cent,” the Federal Open Market Committee said.

The one-notch cut in interest rates was widely expected by investors and economists, and was accompanied by a dovish decision to halt the reduction in the Fed’s balance sheet on August 1, two months earlier than planned.

But two members of the FOMC dissented — Esther George, the president of the Kansas City Fed, and Eric Rosengren of the Boston Fed, said they preferred to keep rates steady — and comments from chairman Jay Powell in his afternoon press conference upset markets that had been looking for a more clearly dovish tone.

Midway through his remarks, the S&P 500 of US stocks was down 1.1 per cent and the dollar spiked 0.5 per cent against its peers, after Mr Powell described the Wednesday cut only as “a mid-cycle adjustment to policy”. The next move by the US central bank would depend on the “evolving data and the evolving risk picture”.

The FOMC statement had hinted that more monetary easing could be forthcoming later in the year. “As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” it said.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, called it a “play-it-by-ear statement”. He said: “It gave markets what they were expecting, but they are not pre-committing to what they are going to do from here.”

Since early June, Fed officials have been pointing to the likelihood of an impending interest rate reduction to buy the US economy some “insurance” against the menacing tide of global economic tremors.

Even though unemployment remains near record lows, and consumption has been remarkably resilient, they have worried about other incoming data including a second-quarter slowdown in US growth, weakness in investment, and persistently low inflation, which is running below the Fed’s 2 per cent target.

The 25 basis point cut in interest rates will disappoint US president Donald Trump, who vociferously pressed the Fed to slash rates more aggressively in the run-up to this week’s meeting, in his latest challenge to the US central bank’s independence.

The Fed’s first interest rate cut in a decade comes as other major central banks are also contemplating additional stimulus. Last week, Mario Draghi, the president of the European Central Bank, paved the way for an easing package, including possible rate cuts and asset purchases, to be launched before the end of his term this autumn to fight persistently low inflation.

The shrinking of the Fed’s balance sheet — which policymakers decided to end earlier than expected — had been pursued in a bid to bring the US central bank’s holdings closer to its pre-crisis level, after several rounds of bond purchases over the past decade.

The Fed also said on Wednesday that it would cut the interest rate it pays banks to keep their excess reserves at the US central bank, from 2.35 per cent to 2.10 per cent, another move designed to stimulate lending and pump money into the economy.

Mr Powell’s decision to press ahead with an interest rate cut represents a remarkable turnround compared to the tightening of policy he pursued last year, during his first months in office. By the very end of 2018, amid signs of a slowdown and a slump in markets, Mr Powell pressed the pause button on the monetary tightening. He eventually moved towards easing after US-China trade negotiations broke down in May and Mr Trump threatened Mexico with sweeping tariffs on its imports in an effort to crack down on immigration.

At this stage, Fed officials are not expecting a deeper slump in the US economy that would require a much more forceful easing cycle. “The labour market remains strong and . . . economic activity has been rising at a moderate pace,” the FOMC said.

The latest median projection from Fed officials for economic growth, published last month, called for 2.1 per cent growth in 2019, followed by 2 per cent in 2020, and 1.8 per cent in 2021. The IMF’s latest forecast, released this month, was rosier for the US this year, expecting 2.6 per cent growth, though it predicted that output would slow to 1.9 per cent in 2020.

Additional reporting by Colby Smith and Peter Wells

Source link