Fed cuts interest rates, signals it may not need to do more

August 01, 2019 08:56
US Federal Reserve Chair Jerome Powell speaks at a news conference in Washington on Wednesday following a two-day policy meeting. Photo: Reuters

The US Federal Reserve cut interest rates on Wednesday for the first time in more than a decade but said the move might not be the start of a lengthy campaign of such easing moves.

In a statement at the end of a two-day policy meeting, the Fed said it decided to cut rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures,” Reuters reports.

The central bank said it will “continue to monitor” how incoming information affects the economy and that it will “act as appropriate to sustain” the expansion.

Fed Chairman Jerome Powell cited signs of a global slowdown, simmering US trade tensions and a desire to boost too-low inflation in explaining the central bank’s decision to lower borrowing costs for the first time since 2008 and move up plans to stop winnowing its massive bond holdings.

“Let me be clear – it’s not the beginning of a long series of rate cuts,” Powell was quoted as saying in news conference after the Fed released its latest policy statement. At the same time, he said, “I didn’t say it’s just one rate cut.”

Financial markets had widely expected the Fed to reduce its key overnight lending rate by a quarter of a percentage point to a target range of 2.00 percent to 2.25 percent, but many traders expected clearer confirmation of forthcoming rate cuts, Reuters noted.

US President Donald Trump, who has repeatedly attacked the Fed’s policy stance under Powell and demanded that it push through big rate cuts, said on Twitter that the Fed chief “let us down” by not telegraphing that an aggressive easing was coming.

“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,” Trump said after the Fed decision. “As usual, Powell let us down.”

Powell and other Fed officials in recent weeks have walked a middle ground, flagging risks like continued uncertainty on the global trade front, low inflation and a weakening world economy, but repeating the view that the United States is fundamentally in a good spot.

The Fed said in its statement it continues to regard the labor market as “strong” and added that household spending had “picked up.” But it noted business spending was “soft” and that measures of inflation compensation remain low.

The Fed said the rate cut should help return inflation to its 2 percent target but that uncertainties about that outlook remain. Sustained expansion of economic activity and a strong labor market are also the most likely outcomes, the Fed said.

The central bank's policy decision drew dissents from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George who argued for leaving rates unchanged.

Rosengren and George have raised doubts about a rate cut in the face of the current expansion, an unemployment rate that is near a 50-year-low, and robust household spending.

Underscoring its decision to ease policy across the board, the Fed also said it will stop shrinking its US$3.6 trillion in bond holdings starting Aug. 1, two months ahead of schedule.

The Fed bought most of the bonds after the 2008 global financial crisis to stimulate a sluggish economy but in more recent months has been letting some of them expire without replacing them.

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