Fed ready for first rate cut since Great Recession
— There’s little dispute WASHINGTON that the Federal Reserve this week will do something it hasn’t done since 2008, when the U.S. economy was gripped by the Great Recession: Cut its benchmark interest rate.
This time, by contrast, the economy is solid by most measures. Consumers are spending. Unemployment is near a half-century low. A recession hardly seems imminent.
Yet the Fed under Chairman Jerome Powell has signaled that rising economic pressures — notably from President Donald Trump’s trade wars and from a global slowdown — have become cause for concern. So has an inflation rate that remains chronically below the Fed’s target level.
So the Fed has decided that a rate cut now — with possibly one or more cuts to follow — could help inoculate the economy against a potential downturn. The idea is that lowering its key short-term rate, which can affect consumer and business loans, could encourage borrowing and spending and energize the economy.
Wall Street has welcomed that prospect. Since the start of the year, the mood of investors has swung from angst about higher rates to elation over the prospect of looser credit. That has helped drive a stock market rally.
Still, skeptics wonder whether Fed rate cuts at this point would really do much to bolster an economy whose borrowing rates are already low. Some even worry that the central bank will be taking a needless risk: By cutting rates now, the Fed is disarming itself of some ammunition it would need in case the economy did slide toward a recession. Some also suggest that by driving rates ever lower, the Fed might be helping to fuel dangerous bubbles in stocks or other risky assets.
Powell will surely be asked about these concerns at a news conference Wednesday after the Fed ends its latest meeting with a policy statement. Reporters will likely also press him about the likelihood of further rate cuts to follow this week’s expected move and also whether continued pressure from President Donald Trump to cut rates is damaging the Fed’s political independence.
Trump kept up his drumbeat of criticism, complaining in tweets Monday that the Fed raised rates “way too early and way too much” and a small rate cut now “is not enough.”
Two government reports last week — on economic growth during the April-June quarter and orders for durable manufactured goods — confirmed the economy remains on firm footing. As a result, some analysts at the Fed may pause after Wednesday’s cut to see if the economic outlook brightens further before deciding on any further easing.
Other analysts foresee two or even three rate cuts this year as the Fed tries to counter global threats that risk spreading to the United States — not just trade rifts but also a potentially botched exit by Britain from the European Union, a weaker China and the risk of a recession in Europe.
In January, Powell and the Fed signaled a sudden policy shift — indicating that they would be “patient” about any changes in rates and implying that rate hikes were off the table.
After U.S.-China trade talks collapsed in May, the Fed went further and began considering acting to sustain the economic expansion, which has just become the longest on record.