WASHINGTON — The U.S. Federal Reserve on Wednesday delivered a widely expected interest rate cut aimed at sustaining a record-long economic expansion, but gave few hints of whether or when it could reduce borrowing costs further.
The U.S. economic outlook is “favorable,” with labor markets strong and inflation likely to return to the Fed’s 2 per cent inflation goal, Fed Chair Jerome Powell said in a news conference after the decision was announced.
But Fed policymakers decided to cut rates, he said, “to provide insurance against ongoing risks” including weak global growth and resurgent trade tensions.
“If the economy does turn down, then a more extensive sequence of rate cuts could be appropriate,” he said. “We are going to be highly data-dependent …. We are not on a preset course.”
The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed this week.
In a hint that the Fed may soon take bigger steps, Powell acknowledged that strains in funding markets had been bigger than expected, and he said the central bank may need to resume increases to the Fed’s balance sheet “earlier” than previously thought.
In lowering the benchmark overnight lending rate to a range of 1.75 per cent to 2.00 per cent on a 7-3 vote, the Fed’s policy-setting committee nodded to ongoing global risks and “weakened” business investment and exports.
The rate cut fell short of the more aggressive reduction in borrowing costs that President Donald Trump had demanded from Fed officials, and he reacted by blasting the central bank and its chief.
“A terrible communicator,” Trump said of Powell in his latest Twitter attack on the central bank and Powell.
“Jay Powell and the Federal Reserve Fail Again,” Trump said.
Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
U.S. stocks, lower ahead of the statement, dropped further, and Treasury yields ticked up from their lows of the day. The 10-year Treasury note yield inched up to 1.79 per cent.
The dollar gained ground against the euro and yen.
“Another rate cut from the Fed to try to shield the U.S. economy from global headwinds,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “Today’s move was more of a hawkish easing in that the Fed’s median forecasts for rates suggested no more cuts this year, while some officials dissented.”
New projections showed policymakers at the median expected rates to stay within the new range through 2020. However, in a sign of ongoing divisions within the Fed, seven of 17 policymakers projected one more quarter-point rate cut in 2019.
Five others, in contrast, see rates as needing to rise by the end of the year.
The divisions were reflected in dissents that came from both hawks and doves.
“There is a lot of uncertainty” around rate-path views and the economic outlook, Powell said.
St. Louis President James Bullard wanted a half-point cut while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George did not want a rate cut at all.
There was little change in policymakers’ projections for the economy, with GDP growth seen at a slightly higher 2.2 per cent this year and the unemployment rate to be 3.7 per cent through 2020. Inflation is projected to be 1.5 per cent for the year, below the Fed’s 2 per cent target, before rising to 1.9 per cent next year.
The Fed also cut rates in July, the first such move since 2008.
Fed officials have said the rate cuts are justified largely because of risks raised by Trump’s trade war with China, a global economic slowdown and other overseas developments.
Their aim, they say, is to balance the potential need for lower rates against the risk that cheaper money may cause households and businesses to borrow too much, as happened in the run-up to the financial crisis more than a decade ago.
© Thomson Reuters 2019