US Federal Reserve cuts interest rates by a quarter point
The US Federal Reserve has cut interest rates for the second meeting in a row amid concerns about a global economic slowdown, in a move which was largely expected by economists.
The central bank lowered its main federal funds target rate by 25 basis points (0.25 percentage points) to between 1.75 and two per cent, slashing the cost of borrowing in the world’s largest economy.
Officials left the door open for a third rate cut in 2019, having last cut rates earlier this summer. However, three policymakers dissented from the decision, with two pushing to leave rates unchanged and one wanting a deeper rate cut of 50 basis points.
In its statement, the Fed said it had cut rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”.
“Although household spending has been rising at a strong pace, business fixed investment and exports have weakened,” it said.
US President Donald Trump, who has kept up unprecedented public pressure for deep cuts, reacted angrily, however, criticising Fed chairman Jerome Powell.
He tweeted: “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”
The federal funds rate controls the cost of mortgages, credit cards and other borrowing. The decision came despite economic growth in the US outperforming its peers and record-low unemployment.
‘Modest adjustments’
Powell said he did not think the Fed will to keep cutting for many more months.
“Generally Fed participants think these will be achieved with modest adjustments to the federal funds rate,” Powell said. “If the economy does turn down, then a more extensive series of rate cuts could be appropriate. We don’t see that; we don’t expect that.”
US stocks were lower ahead of the statement and fell further after, before rallying. The S&P 500 was down 0.04 per cent, the Dow Jones was up 0.09 per cent and the Nasdaq fell 0.18 per cent.
The dollar gained ground against the euro, valued at €1.103 late last night.
The Fed has had a difficult week after a spike in borrowing costs in a vital short-term money market hit record highs, forcing it to loan over $100bn of cash to banks and firms.
Borrowing costs in the repurchasing – or repo – market soared to as high as 10 per cent on Tuesday morning, pushing the US’s main interest rate to above the Fed’s target level of two to 2.25 per cent.
Nigel Green, CEO of deVere Group, said: “Despite immense pressure from President Trump to cut rates further, to provide rocket fuel to the economy ahead of next year’s election, the Fed appears conscious that the labour market is tight and fears wage inflation will kick in.”
Richard Carter, head of fixed interest research at Quilter Cheviot added: “The decision by the Fed to cut interest rates by 0.25 per cent was largely as expected.
“Donald Trump would like them to have done more judging by his regular rants on Twitter but the US economy remains in fairly good shape and there is no sign of an imminent recession so a cautious approach makes sense.
“We are likely to see more gradual interest rate cuts over the course of the year though as the US China trade war continues to hinder the global economy.”
More to follow