February 24, 2020
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Federal Reserve cuts interest rate by quarter-point in effort to keep economy on track

Manuel Balce Ceneta | AP
Manuel Balce Ceneta | AP
Federal Reserve Chairman Jerome Powell speaks during a news conference following a two-day Federal Open Market Committee meeting in Washington, Wednesday, July 31, 2019. The Federal Reserve cut its key interest rate for the first time in a decade to try to counter threats ranging from uncertainties caused by President Donald Trump's trade wars to chronically low inflation and a dim global outlook.

WASHINGTON — The Federal Reserve reduced the benchmark interest rate Wednesday by a quarter-point to about 2.25 percent, a modest and widely expected move that is meant to keep the economy healthy in the face of headwinds from President Donald Trump’s trade war and slower growth overseas.

The Fed released a statement announcing the decision and signaling that the central bank is ready to cut more to stimulate the economy, if necessary. Wall Street is pricing in at least three cuts this year.

“Uncertainties about this [economic] outlook remain,” the Fed wrote, adding, “As the [Fed] 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.”

In addition to the rate reduction, the Fed announced that it would stop selling off assets on its $3.8 trillion balance sheet in August, two months earlier than expected and another easing move.

Historically, the Fed has hardly ever cut rates just once, and Fed leaders appeared to keep the door open to additional easing later this year.

Wednesday’s move marks the first interest rate reduction since December 2008, when the U.S. economy was in the midst of the Great Recession and the stock market had shed a third of its value in a matter of weeks. Today the economy is widely viewed as healthy, with unemployment at a half-century low, stocks are record highs and inflation remaining modest.

Fed leaders have characterized this rate reduction as an “insurance” cut to enhance the economy’s strength in the face of growing problems abroad that could spill into the United States. The Fed pointed to “soft” business investment and low inflation as signs of potential weakness in the economy.

Trump has criticized the Fed repeatedly in the past year and called for a “large” cut in interest rates.

Some economists have questioned why the Fed is stimulating growth at a time when the economy looks solid, if not strong. Two out of 10 members of the Fed’s interest-rate setting committee dissented Wednesday. Boston Fed President Eric Rosengren and Kansas City Fed President Esther George said rates should be left unchanged.

“I would not cut interest rates,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. “Cutting interest rates at this juncture will do only one thing: It will add to additional financial market inflation, which is the last thing in world the Fed should be doing.”

The Fed is mandated to make the best decisions for the economy’s long-term health and ignore political pressure. Scholars and business leaders say Fed independence is a bedrock foundation for the economy and financial markets, and there’s some concern that the Fed might be caving to Trump’s demands.

The president has recently nominated several candidates to the Fed’s board who share his low-rate views, although the Senate has not confirmed any of them.

Former Fed leaders say Powell and his colleagues are making good calls and that Trump’s tweets and criticism are not swaying anyone on the committee.

“I know Jay Powell very well. The chance he would buckle to what the president of the United States said about policy above his knowledge of how it works just seems inconceivable” said former Fed Chairman Alan Greenspan.

 


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