Fed cuts key interest rate to ‘insure’ against global uncertainties
The US Federal Reserve, under intense pressure from President Donald Trump to stimulate the economy, on Wednesday cut the benchmark interest rate for the first time in more than a decade but struggled to justify the move or explain where it goes next.
The move to ease the cost of borrowing was well telegraphed and meant to inoculate against global risks washing onto American shores, but financial markets were whipsawed by confusion over whether another cut would be coming.
Fed Chair Jerome Powell told reporters he remains confident in the US economy and sees no sectors ready to go “bust.” But he said the Fed decided on a 25-basis-point cut in the rate to “insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy.” However, Trump -- who had been loudly calling for a rate cut -- wasted no time in attacking on Twitter, saying the move fell far short of the “aggressive rate-cutting cycle” he wanted.
The target for the federal funds rate was lowered to 2.0-2.25 percent and the central bank again vowed to “act as appropriate to sustain the expansion.” It was a quick turnaround for the Fed, coming after four rate increases last year -- the last one in December.
But Powell tried to paint it as part of a continuum, with central bankers shifting their policy stance as economic data changed over the course of the year, especially trade tensions, which nearly “boiled over” last month but have now returned “to a simmer.” Wall Street plunged after Powell said the Fed was not on the threshold of a “lengthy cutting cycle,” with the Dow Jones Industrial Average at one point losing nearly 500 points.
Powell later clarified, saying that neither was he ruling out another rate cut, and the Dow pared losses to close down a little over 300 points or 1.2 percent.
“Let me be clear. I said it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that,” Powell said.
It was another example of the Fed’s communication woes as it is buffeted by conflicting economic signals and constant verbal attacks.
Nor is the Fed’s policy-setting Federal Open Market Committee presenting a unified front: Esther George, head of the Kansas City Federal Reserve bank, and Eric Rosengren, of Boston, dissented in the 8-2 vote, preferring to leave rates unchanged.
The Fed also gave Trump something else he has demanded in his unrelenting attacks: an early end to a policy known as “quantitative tightening” or QT.
Beginning August 1 -- two months ahead of schedule -- the Fed will stop reducing the huge amount of securities it built up during the global financial crisis.
- Tuning out political pressure - Trump’s aggressive trade policies, and his conflict with China in particular, have thrown a wrench into the world economy and complicated the Fed’s carefully laid plans.
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