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Fed cuts interest rates as expected

By SCOTT REEVES in New York | China Daily Global | Updated: 2019-08-01 23:02
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First cut since 2008 called ‘mid-cycle adjustment’ by Fed Chairman Powell

The US Federal Reserve on Wednesday cut interest rates by a quarter-percentage point to buoy the US economy amid a global slowdown and the continuing US-China trade dispute.

The widely expected move was the first time the Federal Open Market Committee cut the federal funds rate since 2008, when the subprime mortgage crisis threatened to engulf the US economy.

The Fed reduced the rate range from 2.00-2.25 percent from 2.25-2.50 percent, making it cheaper for businesses to borrow to expand and for consumers to buy on credit.

The FOMC in its policy statement singled out the current global economic slowdown without mentioning the ongoing US-China trade dispute:

"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.

"As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion."

But at a news conference following the Fed's decision, Fed Chairman Jerome Powell said the rate cut was a "mid-cycle adjustment", indicating that additional cuts later this year were not assured.

"That refers back to other times when the FOMC has cut rates in the middle of a cycle, and I'm contrasting it there with the beginning of a lengthy cutting cycle," Powell told reporters. "That is not what we're seeing now, that's not our perspective now. You have to look at not just the 25 basis-point cut, but look at the committee's actions over the year."

The market, which had included a quarter-point cut in its outlook, fell on the news that future cuts were not assured. The Dow Jones Industrial Average closed Wednesday at 26,864.27, down 333.75 points, or 1.23 percent.

For the first time since Powell became Fed chairman in February 2018, two of the committee's 10 members dissented.

Kansas City Fed President Esther George and Boston Fed President Eric Rosengren opposed the action, saying they "preferred to maintain the target range for the federal funds rate".

US President Donald Trump has criticized the Fed's four rate increases in 2018, arguing that current rates constrain the economy.

Trump tweeted his displeasure at the quarter-point cut.

"What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.

"As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn't have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!"

Quantitative tightening is a monetary policy to decrease liquidity in the economy. It is the reverse of quantitative easing, which is aimed to increase money supply to stimulate the economy.

On Monday, Trump had tweeted: "The EU and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product. In the meantime, and with very low inflation, our Fed does nothing — and probably will do very little by comparison. Too bad!"

The European Central Bank's key interest rate has been zero since March 2016. China's benchmark interest rate has been 4.35 percent since October 2015.

The current economic expansion, now the longest in US history, began in June 2009 and could be showing signs of slowing. Economic growth dipped to 2.1 percent in the second quarter after growing at a 3.1 percent annual rate in the first, a decline of 32.26 percent, the US Bureau of Economic Analysis reported.

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