US Fed cuts interest rates once more, as uncertainties remain

Central bank watchers say monetary easing is key part of strategy to counter strong global economic headwinds.

United States Federal Reserve Board Chairman Jerome Powell has tried to strike a delicate balance for the economy during an uncertain time [Win McNamee/Getty Images/AFP]
United States Federal Reserve Board Chairman Jerome Powell has tried to strike a delicate balance for the economy during an uncertain time [Win McNamee/Getty Images/AFP]

To help sustain the United States economic expansion in the face of widespread trade tensions and slowing global growth, the US Federal Reserve cut its benchmark interest rate on Wednesday for the third time this year.

The Fed reduced its short-term borrowing rate, which influences a broad range of consumer and business loans, by one-quarter percentage point to a range of 1.5 percent to 1.75 percent.

“The labor market remains strong,” the Fed said in a statement. “Economic activity has been rising at a moderate rate,” it added. “But uncertainties about this outlook remain.”

A third cut on Wednesday – following previous cuts in July and September – nearly reverses the four rate hikes that the Fed made last year in response to a strengthening economy.

Many economists believe the Fed’s policymaking committee has signalled that it is finished lowering rates for now, but that the central bank is keeping its future options open.

This year, rising global risks have led the Fed to change course and begin easing borrowing costs. Lower rates are intended to encourage more lending and spending to support growth.

Fed Chairman Jerome Powell has said that the central bank’s rate reductions are intended as a kind of insurance against threats to the economy, notably from the trade war that US President Donald Trump has unleashed with China, and weaker growth in Europe and Asia.

Powell said at a press conference following the meeting that monetary policy was “in a good place” and that the current stance would be “appropriate” as long as any new information is broadly consistent with the Fed’s present perspective.

He has often pointed to similar rate cuts in 1995 and 1998 as precedents. In both of those cases, the Fed cut rates just three times as well.

The two-day policy meeting this week is also the first since the Fed announced new policies for managing its balance sheet, including allowing its asset holdings to continue to grow again with the purchase of $60bn a month in Treasury bills.

‘We are winning anyway’

The key issue at this week’s meeting is whether the Fed has taken out enough insurance yet against economic headwinds. Powell and most other Fed officials already credit their rate cuts with lowering mortgage rates, boosting home sales and broadly keeping the economy on track.

The Fed is also considering the consequences of a decline in expectations for inflation. That represents a problem for the Fed because its preferred inflation gauge has been stuck below its two-percent target for most of the past seven years.

In the meantime, Trump has renewed his attacks on the Fed for not lowering its benchmark rate closer to zero – with Twitter comments that contrasted the Fed’s actions unfavourably with central banks in Europe and Japan, which have slashed their rates into negative territory.

“The Fed doesn’t have a clue! We have unlimited potential, only held back by the Federal Reserve,” Trump tweeted. “But we are winning anyway!”

Though Trump has suggested that this puts the US at a competitive disadvantage, most economists regard negative interest rates as a sign of weakness.

Some international tensions have eased since the Fed’s last meeting in mid-September, which suggests further rate cuts are less necessary. The US and China reached a temporary trade truce earlier this month and are working on a phase-one agreement.

However, that deal may not cover much ground, and Trump has yet to drop his threat of imposing new tariffs on Chinese goods beginning December 15.

Another source of international tension has been Brexit, which has also eased. The European Union agreed Tuesday to delay the deadline for Britain’s exit from the EU trade bloc, changing it from October 31 to January 31. That postpones what could have been a disruptive departure damaging the economies of the United Kingdom and the EU.

US economic expansion

Regardless, the US economy is still growing. Business hiring remains steady, though there are signs of declining momentum in recent data.

US manufacturing activity is at a decade low, amid sobering global signals that the trade war is having an impact – which the International Monetary Fund has described as a “synchronised slowdown“.

Americans cut back slightly on spending at retailers and restaurants in September, a troubling sign for major drivers of economic growth. But consumer confidence remains high, and shoppers could bounce back in the coming months.

Businesses have reduced their investments in industrial machinery and other equipment, mostly because the US-China trade war has made them reluctant to commit to big purchases. The tit-for-tat tariffs between the US and China, the world’s two largest economies, have dented exports somewhat.

Earlier Wednesday, the government issued its first estimate of how the economy fared in the July-September quarter – an annualised growth rate of 1.9 percent. Resilient consumer spending and an apparent rebound in exports offset declining business investment.

The job market remains sturdy, with the unemployment rate at just 3.5 percent, the lowest in 50 years. Consistent hiring and decent wage increases should help underpin spending in the coming months, extending the economic expansion.

The housing market has also improved, after slumping in 2018, thanks in part to the Fed’s rate cuts. Mortgage rates have fallen more than a full percentage point from a year ago, on average, for a 30-year fixed-rate loan.

Sales of existing homes have climbed, as have those of new homes. Auto purchases, also sensitive to interest rates, have also picked up.

Source: Al Jazeera, News Agencies

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