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Federal Reserve cuts interest rates for first time since GFC

Officials also stopped shrinking the Fed’s balance sheet effective August 1, ending a process that very modestly tightens monetary policy and was previously scheduled to come to a close at the end of September.

Policy makers appeared open to another cut as early as September when they next convene, while sticking with wording in their statement that preserves their options.

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“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,” they said.

Kansas City Fed President Esther George and Boston’s Eric Rosengren voted against the cut. The statement said they “preferred at this meeting to maintain the target range for the federal funds rate.” It was the first time since Powell took over as chairman in February 2018 that two policy makers dissented.

Investors had forecast the Fed to continue easing monetary policy this year, with futures pricing the key rate to fall about another half-point by January. US stocks rose to a record last week in anticipation of easier money, while the yield on two-year Treasuries has undershot 2 per cent since May.

Powell will hold a press conference at 2.30pm local time, with investors eager for clues on how much lower the Fed will go.

While the domestic economy has performed relatively well, the Fed cut amid concern that softness abroad threatens the decade-long US expansion. Trump’s trade war with China is hurting foreign demand. Data released earlier Wednesday, local time, showed the pace of quarter-over-quarter growth in the euro area slowed by half
in the latest three months to 0.2 per cent.

Donald Trump's trade war with China is hurting foreign demand.

Donald Trump’s trade war with China is hurting foreign demand.Credit:AP

In the US, after growing 2.5 per cent last year, fuelled by now-fading tax cuts and higher government spending, the economy expanded at a 2.1 per cent annualised pace in the second quarter. The trade dispute was blamed for a manufacturing slowdown and the first drop in business investment since 2016.

In their assessment of the US economy, officials made only minor changes to their statement language.

Powell has repeatedly said the Fed’s “overarching goal” is to keep growth going. Acting now, when the central bank has less room to pare rates than in past downturns, is partly aimed at getting ahead of any potential slump.

Lacklustre inflation also offered the Fed space and reason to ease. Its preferred price gauge, excluding food and energy, rose 1.6 per cent in June from a year earlier and hasn’t met the Fed’s 2 per cent target this year.

Trump is unlikely to be satisfied as he puts the economy at the heart of his re-election bid. He has broken with convention and undermined the Fed’s political independence by lobbying it to loosen policy and publicly questioning his nomination of Powell as chairman.

At his press conference, Powell will almost certainly be asked if the Fed buckled to that pressure. He may also be quizzed on whether the Fed, if requested, would join the US Treasury in any effort to weaken the dollar given Trump’s complaints about the currency’s value.

Limited Scope

While Trump and some investors wanted the Fed to be more aggressive, its scope for doing so is limited. Stocks are high, unemployment is around the lowest in a half-century and consumers continue to spend. At the same  time, a measure of business in the Chicago region fell this month to the lowest since late 2015.

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The rate reduction was the first since December 2008 when the Fed dropped its benchmark effectively to zero as it battled recession and financial crisis. It began raising borrowing costs in December 2015, doing so another eight times. Officials indicated as recently as December they intended to continue to hike this year.

They dumped that plan in January as financial markets fretted monetary policy had become too restrictive.

Fellow central banks are set to follow the Fed. Those in India, South Africa and Australia are among those to have cut this year. The European Central Bank has indicated it will do so in September.

A worry for policy makers is that a decade of easy money leaves them short of ammunition for fighting a serious downturn. That likely means governments will face demands to do more if economies keep struggling.

Bloomberg

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