Fed cuts interest rate as expected
The Federal Reserve reduced the benchmark interest rate Wednesday by a quarter-point to about 2.25 percent, a modest and widely expected move that’s meant to keep the economy healthy in the face of President Donald Trump’s trade war and slower growth overseas.
The move was the first interest-rate reduction since December 2008, when the nation was in the midst of the Great Recession. Fed Chairman Jerome Powell, a frequent target of Trump’s ire, said the Fed took this action to keep the economy growing for as long as possible.
Stocks fell sharply during Powell’s news conference shortly after the ratecut announcement. The Dow Jones industrial average shed more than 300 points after Powell said this was not “the beginning of a lengthy cutting cycle,” suggesting there would be only another cut or two after this.
“Let me be clear. It’s not the beginning of a long series of rate cuts. I didn’t say it’s just one (cut) or anything like that,” Powell said. “It’s appropriate to adjust monetary policy to a somewhat more accommodative stance.”
Wall Street has been
pricing in at least three rate cuts this year. Trump has bashed the Fed repeatedly in the past year and called for a “large” cut in interest rates. Historically, the Fed hardly ever has cut rates just once, and Fed leaders appeared to keep the door open to additional easing later this year.
The market’s message to Powell is “not enough,” tweeted Guy LeBas, chief fixed-income strategist at the Janney financial firm.
In addition to the rate reduction, the Fed announced it would stop selling off its $3.8 trillion assets in August, two months earlier than expected, in another easing move.
The Fed bought a large amount of Treasury bonds and mortgagebacked securities in the aftermath of the financial crisis to keep interest rates low. The central bank started to sell some of its holdings in recent months because it didn’t think extra stimulus was necessary anymore. Now the Fed is putting this on hold.
“Weak global growth, trade policy and muted inflation” prompted the Fed’s actions Wednesday,
Powell said.
He characterized the U.S. economy as “positive” and said most of the problems are coming from overseas. He specifically mentioned Europe and China.
“There is really nothing in the U.S. economy that presents a prominent near-term threat. … There is no segment or sector that is really boiling over,” Powell said. “Downside risks are really coming from abroad.”
Some economists have questioned why the Fed is stimulating growth at a time when the economy looks solid, if not strong. Two of 10 members of the Fed’s ratesetting committee dissented Wednesday. Boston Fed President Eric Rosengren and Kansas City Fed President Esther George said rates should be left unchanged.
“I would not cut interest rates,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. “Cutting interest rates at this juncture will do only one thing: It will add to additional financial market inflation, which is the last thing in the world the Fed should be doing.”
The last time the Fed cut rates, the U.S. economy was deep in the financial crisis. The stock market had shed a third of its value in a matter of weeks, and unemployment was over 7 percent. Today, the economy is widely viewed as healthy, with unemployment at a half-century low, stocks at record highs and inflation remaining modest.
Fed leaders have characterized this rate reduction as an “insurance” cut to enhance the economy’s strength in the face of growing problems abroad that could spill over into the United States. The Fed pointed to “soft” business investment and low inflation as signs of potential weakness in the economy.
The Fed is supposed to make the best decisions for the economy’s long-term health and ignore political pressure. Scholars and business leaders say Fed independence is a bedrock foundation for the economy and financial markets, and there’s some concern the Fed might be caving to Trump’s demands.
“I think Powell did this to push back on the White House and signal the Fed’s independence,” Kristina Hooper of Invesco said. “I believe that in Powell’s mind, a short-term selloff was a small price to pay to assert the Fed’s right to self-determination.”
The president recently nominated several candidates to the Fed’s board who share his lowrate views, although the Senate has not confirmed any of them.
Former Fed leaders say Powell and his colleagues are making good calls and that Trump’s tweets and criticism aren’t swaying anyone on the committee.
“I know Jay Powell very well,” former Fed Chairman Alan Greenspan said. “The chance he would buckle to what the president of the United States said about policy above his knowledge of how it works just seems inconceivable.”