Abu Dhabi, UAEMonday 6 April 2020

Fed cuts key US interest rate amid economic uncertainty

Target for federal funds rate is 2.0 to 2.25 per cent, 25 basis points lower

A screen displays the US Federal Reserve interest rates announcement as traders work on the floor of the New York Stock Exchange (NYSE) in New York, US, July 31, 2019. REUTERS/Brendan McDermid
A screen displays the US Federal Reserve interest rates announcement as traders work on the floor of the New York Stock Exchange (NYSE) in New York, US, July 31, 2019. REUTERS/Brendan McDermid

The US Federal Reserve cut the benchmark lending rate on Wednesday for the first time in more than a decade, to stimulate the economy after a year of sustained pressure from President Donald Trump.

The target for the federal funds rate is now 2.0 to 2.25 per cent, 25 basis points lower.

But two officials on the Federal Open Market Committee, which sets policy, opposed the move to provide more stimulus to the economy, and dissented in the vote.

The Fed also gave Mr Trump something else he has demanded in his unrelenting attacks: an early end to a policy known as "quantitative tightening".

Starting on August 1, that means the Fed will stop reducing the huge amount of securities it built up during the global financial crisis.

"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 to 2 to 2.25 per cent," the committee said.

While the committee continues to expect sustained economic expansion and gradually rising inflation to the Fed's 2 per cent target, "uncertainties about this outlook remain".

Officials will "continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2 per cent objective".

Fed chairman Jerome Powell will speak at 6.30pm local time, which will be closely watched to see if he hints that more interest rate cuts are ahead.

It was a fairly sudden reversal for the Fed, which raised the rate that influences the cost of all types of business and consumer loans, including credit cards and mortgages, four times last year, most recently in December.

Mr Trump, whose aggressive trade policies have thrown a wrench into the world economy and complicated the Fed's carefully laid plans, will welcome the rate cut and probably call for more, as he has been doing for months.

But Esther George, head of the Kansas City Federal Reserve bank, and Eric Rosengren, of Boston, dissented in the 8-2 vote, because they preferred to keep the target range for the federal funds rate at 2.25 to 2.5 per cent.

With unemployment at 3.7 per cent, near the lowest in 50 years, and average job creation in the first half of this year having slowed to 172,000 new positions a month, which is still solid, some economists see little need for the Fed to provide more stimulus.

Others see concerns on the horizon, such as a slowdown in China's growth, the EU on the brink of an unknown Brexit outcome, a reduction in US business investment and rising corporate debt levels. They say the Fed is right to retreat for now.

"The Fed is focused on inflation and for good reason," Canaccord Genuity chief equity strategist Tony Dwyer said.

"The Fed has spent decades worried about higher inflation when the economy reaches full employment, yet when it reached the historically low current level, there was no sign of it."

Inflation is "monster that hasn't come", Mr Dwyer said.

But economist Joel Naroff disagreed.

"The data don't point to a faltering economy, only a moderating one," Mr Naroff said in a research note.

"Where we go from here, though, is the real question, and given the rapidity with which Whiplash Jay changes direction, I have little idea what the next move will be."

Updated: July 31, 2019 11:35 PM

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