- 31st July 2019
- Posted by: Hakeem
- Categories: Economics, POLITICS
- The Federal Open Market Committee concluded its two-day meeting on Wednesday.
- President Donald Trump has been vocal in urging the Fed to cut rates.
- The last time the Fed raised interest rates was in December 2008.
The Federal Reserve lowered its benchmark rate by a quarter-point Wednesday as an insurance policy not against what’s wrong with the economy now but what could go wrong in the future.
Amid President Donald Trump’s intense political pressure and persistent market expectations, the policymaking Federal Open Market Committee dropped the target range for its overnight lending rate to 2% to 2.25%, or 25 basis points from the previous level.
In approving the cut, the FOMC cited “implications of global developments for the economic outlook as well as muted inflation pressures.” The committee called the current state of growth “moderate” and the labor market “strong,” but decided to loosen policy anyway.
The rate is tied to most forms of consumer debt and is likely to almost immediately have an impact on lowering credit costs.
The Fed also left the door open to future cuts, saying it will “act as appropriate to sustain the expansion” as it continues to evaluate the incoming data.
The vote to cut also came with a move to end, two months earlier than planned, the reduction of bonds the central bank holds on its balance sheet.
“This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain,” the FOMC’s post-meeting statement said.
The rate cut saw two dissents, with Fed presidents Esther L. George of Kansas City and Eric Rosengren of Boston casting no votes, as many observers had expected.
Trump had been looking for a 50 basis point cut, so it remains to be seen whether the easing will stem his ongoing criticism of Chairman Jerome Powell and his fellow policymakers.
The move marked the first reduction in the funds rate since Dec. 16, 2008 as the U.S. economy was spiraling through a financial crisis that had threatened to crush the global economy. In that case, a sense of urgency over the depth of the downturn pushed the FOMC to take the rate from 1% down to a range of 0%-0.25%, where it remained for seven years.
In making the move following this week’s two-day meeting, policymakers noted business investment that “has been soft” though household spending “has picked up from earlier in the year.”
Along with the rate cut, the committee decided to end the reduction of bonds it is holding on its balance sheet.
In another action aimed at resuscitating the moribund crisis-era economy, the Fed had instituted three rounds of purchases involving Treasurys and mortgage-backed securities. The program, known in the markets as quantitative easing, took the balance sheet past $4.5 trillion at one point.
In October 2017, the committee began reducing the size of the bond portfolio by allowing a capped level of proceeds to roll off each month while reinvesting the rest.
The end had been targeted for September, but the FOMC decided to go two months earlier, with all proceeds now to be reinvested as of Thursday.
In all, the holdings fell by $618 billion, but remain at $3.6 trillion. That’s well above the level most Fed officials and market participants anticipated by the time the rolloff finished. Ending the program sooner than expected is indicative that it did not turn out to be, as former Chair Janet Yellen had once estimated, “like watching paint dry.”
Instead, the nine rate hikes since December 2015 as well as the end of QE would up being more disruptive than Fed officials had anticipated. Current Chairman Jerome Powell learned that the hard way when markets erupted after he said in December that the balance sheet reduction was on “autopilot.”
Powell had gotten himself into trouble two months earlier when he said, in October, that the funds level was “a long way from neutral,” or the level that would be considered neither stimulative nor restrictive and imply an end to rate hikes.
Trump has intensified his broadsides against the Fed, on occasion calling the central bankers “crazy” for raising rates and intimating that Powell’s job could be in jeopardy. The president and his top economic advisor, Larry Kudlow, have called for a half- point cut and an immediate cessation to what Trump calls “quantitative tightening.”
By the White House’s view, economic growth would be even stronger than the above-trend pace it has kept since Trump’s election. GDP rose 2.1% in the second quarter and 3.1% in Q1, and the unemployment rate is at 3.7%, close to a 50-year low. At the same time, the stock market has been trading around record levels.
But Trump has insisted that without the Fed’s tightening, GDP growth would be somewhere north of 4% and the Dow Jones Industrial Average would be 10,000 points higher.