Fed Decreases Interest Rates
As widely expected, the US Federal Reserve has decreased its interest rate as a move to provide a stimulus to the US economy. The decrease in rates is the first such reduction in more than a decade when rates were dropped to historically low levels as a measure to combat the worst of the Global Financial Crisis. When rates could move no lower, the Federal Reserve (and other central banks) turned to non-conventional means, quantitative easing, to foster economic recovery. US interest rates remained on hold at 0.25% between December 2008 and December 2016.
The normalisation process which started under Janet Yellen, saw interest rates rise cautiously from 0.25% to a “high” of 2.5% over the period between December 2016 and December 2019 as the Fed sought to “re-arm” its main anti-inflation and economic stimulus weapon, the interest rate. For comparison purposes, the long-term average figure for US interest rates is 5.66%, so a level of 2.5% is still quite modest.
The Fed’s Open Markets Committee which decides on interest rate policy voted by eight votes to two to cut rates by 0.25% to a band from 2-2.5%. The central bank had been under “tweeted” pressure from President Trump to cut rates, but Chairman Powell strongly denied that political pressure had factored into the decision. US stock markets fell by 1% following the announcement as Powell left the door open to further cuts.
Justifying the move, Jerome Powell pointed out that there had been both “positive and negative developments” in the economy. Whilst the economy had grown “at a healthy pace” in the first two quarters of the year, manufacturing output had seen two quarters of decline. Slowing global growth had also been a factor in the Fed’s decision to cut rates. Powell noted: "Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%."
President Trump was, characteristically, unimpressed, tweeting:
"As usual, Powell let us down. 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.”
It remains to be seen if this decline in interest rates will be a one-off, or the first in a series of cuts.