U.S. Fed cuts rates quarter point first time since 2008 crisis
Move intended to protect American economy from slowing global growth, trade turmoil
WASHINGTON— The U.S. Federal Reserve has cut interest rates for the first time in more than a decade, in an effort to guard the record-long economic expansion in the country against mounting global risks.
The widely expected quarter-point move, the Fed’s first since it cut rates to near zero in 2008, is meant to protect the economy against the potentially harmful effects of a growth slowdown in China and Europe and uncertainty from President Donald Trump’s trade war.
“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,” according to the Federal Open Market Committee’s policy statement.
In Canada, the Bank of Canada has held its key interest rate at 1.75 per cent since October 2018. Its next rate announcement is expected Sept. 4.
The Fed also announced an early end to its efforts to shrink its balance sheet, another attempt to keep the U.S. economy moving.
The central bank’s holdings of government-backed bonds swelled during the financial crisis, as it bought assets to try to reinvigorate growth. Policymakers have been slowly siphoning off securities to return their balance sheet to a more normal size, and that process was slated to end in September. It will now conclude Thursday.
Both Eric Rosengren, president of the Federal Reserve Bank of Boston, and Esther George, president of the Federal Reserve Bank of Kansas City, Mo., voted against Wednesday’s decision, preferring instead to leave rates unchanged. Those dissents marked the second and third of Jerome Powell’s term as the Fed’s chair.
While Fed officials said they expect economic expansion to continue and the labour market to remain strong, “uncertainties about this outlook remain.”
Officials did not indicate whether this cut would be followed by additional moves. The Fed’s June economic projections suggest policymakers envision cutting rates slightly to shore up the economy, rather than beginning an easing cycle that will return rates to zero.
“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,” the Fed said in its statement, seemingly leaving its options open.
The move was widely expected.
It was largely greeted with a shrug in financial markets, where investors have been factoring in a quarter-point rate cut for weeks. The S&P 500, which had been roughly flat before the 2 p.m. decision, briefly slumped before clawing back those losses. Shortly before 2:15 p.m. Eastern time, the benchmark index was basically unchanged. Likewise, yields on Treasury bonds were largely unchanged a few minutes after the announcement, with the10year Treasury note yielding 2.02 per cent.
The Fed’s rate cut carries political risks, given Trump’s attacks on the central bank. Trump has been denouncing the Fed in speeches and on Twitter for the past year, criticizing its four 2018 rate increases and blaming its policies for slowing the U.S. economy. Some onlookers may see Wednesday’s move as caving to the president.
The Fed operates independently of the White House. It attributed the change, which officials have been signalling for months, to growing economic concerns.
The central bank is trying to extend a record-long economic expansion, because officials believe that doing so will allow the Fed to achieve its goals of maximum employment and slow but steady inflation. The unemployment rate is hovering around its lowest level in 50 years, but that has yet to push wages dramatically higher in a way that forces companies to lift prices more quickly.
Inflation has run shy of the Fed’s 2 per cent goal since the central bank formally adopted it in 2012. A little inflation helps to grease the wheels of a healthy economy, allowing businesses to raise wages faster and lifting interest rates, giving the central bank more room to cut in the event of a downturn.
Prices picked up just 1.6 per cent in the year through June, not counting volatile food and fuel costs.
Wages are growing only moderately. An index of employment costs climbed by 2.7 per cent in the second quarter from a year earlier, less than expected and a slowdown from earlier in 2019, according to data released Wednesday.
Global policy uncertainty has also increased, and manufacturing is slumping globally. Growth is slowing in China and Europe, and Trump’s trade war with China and threats of further tariffs on U.S. trading partners are stoking uncertainty and causing businesses to hold off on investment.
Those developments threaten the U.S. economic outlook, even as growth remains solid, consumer spending is robust and the job market holds up for now.