US Federal Reserve cuts interest rates for third time in 2019

US Federal Reserve cuts interest rates for third time in 2019
# 30 October 2019 22:45 (UTC +04:00)

The Federal Reserve cut interest rates Wednesday for the third time this year while signaling that it may pause to weigh incoming data before adjusting borrowing costs again, APA reports citing The New York Times.

The decision to lower rates to a range of 1.5 to 1.75 percent came as a global manufacturing slowdown and uncertainty stemming from President Trump’s trade war continue to pose risks to the domestic economy.

The Fed’s vote was not unanimous, with two officials voting against another cut.

Fed officials cut rates in both July and September, and they have likened their recent moves to taking out insurance. Although the economy is holding up — growth remains near potential, consumers are spending and the unemployment rate is at a half-century low — central bankers are trying to inoculate the economy against any future slowdown.

While risks to the outlook remain, the Fed hinted Wednesday that it is now shifting into a more patient mode. The central bank dropped a key line from its post-meeting statement in which it pledged to “act as appropriate to sustain the expansion,” language it had been using to signal a willingness to lower interest rates.

“The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate,” the Fed’s statement said, explaining that while the Fed expects to hit its inflation and employment goals, “uncertainties about this outlook remain.”

The Fed has now cut its policy rate by a cumulative 0.75 percentage point this year, just as it did during two mid-business cycle interest rate adjustments in the 1990s. Because central bank policy changes act on the economy with a lag, some officials have indicated that they would like to see how incoming data shape up before making further adjustments.

Chair Jerome H. Powell, speaking at a news conference, said the Fed cut rates again “to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.”

Mr. Powell said the Fed expects the economy to expand at a “moderate” rate and that the job market remains “strong.” But trade tensions have “weighed” on the economy, along with slowing global growth.

Still, Mr. Powell suggested the Fed was once again in a wait-and-see mode and that policymakers would watch incoming data to see whether another cut was warranted.

“Policy is not on a preset course,” he said. “We see the current stance of policy as likely to remain appropriate” as long as incoming information remains “broadly consistent with our outlook.”

The primary factor that would cause the Fed to act again, he said, is if “developments emerge” that would cause the Fed to “materially reassess” its outlook.

The Fed lifted rates four times in 2018 as the economy strengthened, partly because of Mr. Trump’s 2017 tax cuts and higher government spending. It has now reversed most of those moves amid a slowing economy.

But that is unlikely to satisfy Mr. Trump, who has been urging the central bank to slash rates for more than a year and recently said the Fed should cut rates to zero or below. Mr. Trump said in a tweet earlier this month that the central bank would be “derelict” in its duties if it failed to lower rates further. He often couches his calls for cheaper borrowing costs in competitive terms, comparing the United States’ monetary policy to that in Europe, where the economy is weaker and a key policy rate is negative.

The Fed has the task of maintaining maximum employment and stable inflation, and it does so primarily by lowering or raising borrowing costs to stoke or slow borrowing and spending. It is currently working against a complicated economic backdrop.

Unemployment is historically low, the labor market is expanding and consumer spending is strong. But job gains are cooling off, wage growth has shown early signs of weakening and consumer sentiment is slipping.

The Fed has failed to sustainably hit its 2 percent inflation target since formally adopting it in 2012, and various measures of consumer and market inflation expectations have recently drifted lower. That creates a risk that price increases will become mired permanently below the central bank’s goal, leaving it with less room to cut interest rates — which include inflation — in a downturn.

Overall economic growth is also slowing from a stronger pace in 2018 and early 2019, a Commerce Department report showed earlier Wednesday, though it remains close to the Fed’s estimate of its longer-run potential. That is consistent with what the policymakers expected: They have long believed that the economy would slow down once the effects of Mr. Trump’s tax cuts and higher government spending had played out.

Still, stock prices are soaring, and the housing market has stabilized as mortgage rates have fallen. While it is not obvious how or even whether the trade war will end, Mr. Trump has said that negotiators are making progress toward a first-phase deal with China.

Those hopeful signs could help the economy find a more solid footing. Some officials are also wary of stoking asset price bubbles and unhealthy risk-taking by lowering interest rates too much and too early.

Both Esther George, the president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, the president of the Federal Reserve Bank of Boston, voted against Wednesday’s rate cut. They have both previously dissented against the rate cuts, saying that they would prefer to see a more pronounced deterioration in economic data before lowering rates.

James Bullard, the president of the Federal Reserve Bank of St. Louis, had dissented in favor of a larger rate cut in September, but voted in favor of October’s quarter-point adjustment.

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