Fed Cuts Interest Rates for First Time Since 2008 Crisis

Aug 01, 2019

The Federal Reserve cut interest rates on Wednesday for the first time in more than a decade, as it tried to keep America’s record-long economic expansion going by insulating the economy from mounting global risks.

The widely expected quarter-point decrease was the Fed’s first since it slashed rates to near zero in 2008. But unlike those cuts, which were intended to rescue a failing economy, Wednesday’s move was seen as a precautionary effort to protect the United States from slowing growth in China and Europe and uncertainty over President Trump’s trade war.

“The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook,” the Fed chair, Jerome H. Powell, said at a news conference after the decision. The cut, Mr. Powell said, was “intended to ensure against downside risks from weak global growth and trade tensions.”

It was a turning point, but one that disappointed both markets and Mr. Trump, who were hoping for a bigger rate cut. The Fed, which dropped its target rate to a range of 2 percent to 2.25 percent, stopped short of signaling the beginning of an aggressive rate-cutting campaign. By the end of the day, the S&P 500 was down 1.1 percent, the benchmark index’s worst decline since May 31.

The Fed suggested its move was a small adjustment meant to help the economy weather uncertainty. While Mr. Powell left the door open to additional cuts, he said officials did not expect this to turn into the sort of deep cutting cycle that the Fed has done in the past to avert or offset recessions.

“It’s not the beginning of a long series of rate cuts — I didn’t say it’s just one,” Mr. Powell said. “What we’re seeing is that it’s appropriate to adjust policy to a somewhat more accommodative stance over time, and that’s how we’re looking at it.”

Not every Fed official agreed with cutting rates at a moment when the economy continues to grow, unemployment is at a 50-year low and wages are beginning to rise. Both Eric Rosengren, the president of the Federal Reserve Bank of Boston, and Esther George, the president of the Federal Reserve Bank of Kansas City, voted against Wednesday’s decision, preferring instead to leave rates unchanged. Those were the second and third dissents of Mr. Powell’s term as chair.

Officials also announced an early end to their efforts to shrink the Fed’s balance sheet, another attempt to keep the economy moving. The central bank’s holdings of government-backed bonds swelled during the financial crisis as the Fed bought assets to try to reinvigorate growth. Policymakers have been siphoning off securities to return the balance sheet to a more normal size, and that process — known as quantitative tightening — was scheduled to end after September. It will now conclude on Thursday.

Central bankers are operating against a fraught political backdrop as they navigate an uncertain outlook. Manufacturing is slumping the world over, and growth is slowing in China and Europe.

Mr. Trump’s trade fights have also thrown the Fed a curveball, as the president zigzags between fighting and negotiating with China and threatening tariffs on large trading partners, like Mexico. That unpredictability has begun to weigh on business investment in the United States and abroad, sowing concern among Fed officials and prompting the central bank to shift policy.

The Fed has gone from a steady campaign of raising rates in 2018 to signaling a patient approach throughout the spring to ushering in a rate cut in July. While the economy is strong and jobs are plentiful, Mr. Powell nodded to the impact Mr. Trump’s trade approach is having on the Fed, saying the policy uncertainty is complicating its decision-making.

“I would love to be more precise, but with trade, it is a factor that we have to assess in kind of a new way,” Mr. Powell said.

Mr. Trump has blamed the Fed for slowing the American economy, criticizing its four 2018 rate increases and denouncing Mr. Powell’s leadership. The president continued to assail the Fed on Wednesday, saying its move was too small.

“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,” Mr. Trump said in a tweet, adding, “As usual, Powell let us down.”

 

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....

— Donald J. Trump (@realDonaldTrump) July 31, 2019

Mr. Powell has repeatedly said the Fed operates independently of the White House and does not factor its views into decision making.

Markets were also looking to Mr. Powell for more. The widely expected move from the central bank was initially greeted with a shrug in financial markets, where investors have been factoring in a rate cut for months. But the stock market turned lower after Mr. Powell began his news conference at 2:30 p.m., as investors absorbed the chair’s comments that the Fed was making a “midcycle adjustment” as a signal that the Fed was not headed toward a string of rate cuts, as investors had hoped.

“People are saying, ‘Oh gosh, you’re not going to ease a lot in midcycle,’” said Matt Maley, an equity strategist at the brokerage firm Miller Tabak.

Mr. Powell repeatedly suggested that the Fed viewed this cut as a recalibration, perhaps one that is more similar to two midcycle moves in the 1990s, when the Fed cut rates slightly to get the economy through periods of uncertainty. Both of those instances ended in 0.75 percentage points of rates cuts, though Mr. Powell said on Wednesday that he did not know whether this iteration would be “comparable or not” to previous midexpansion adjustments.

The policy-setting committee did not tip its hand about additional cuts in its statement, saying that “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.”

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 drastically higher in a way that forces companies to lift prices more quickly.

Inflation has run shy of the Fed’s 2 percent 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 percent 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 percent in the second quarter from a year earlier, less than expected and a slowdown from earlier in 2019, according to data released on Wednesday.

“They’re broadly comfortable with the way the economy is performing, but they’re worried about risks and they’re worried about inflation,” said Nathan Sheets, the chief economist at PGIM Fixed Income, explaining that he thinks the Fed has left the door open for a little bit more cutting, but with limits. “They’re thinking, You know, maybe another one later in the year — maybe two over the next year or so.”

 

Source: The New York Times