Business

Fed delivers third rate cut this year

The Federal Reserve announced Wednesday that it would cut interest rates for the third consecutive time this year as the U.S. economy continues to slow amid a global slump.

The central bank’s policymaking arm, the Federal Open Markets Committee (FOMC), voted 8 to 2 on Wednesday to cut its baseline interest rate range by 0.25 percentage points to a 1.5 percent to 1.75 percent target.

The FOMC also said it will “continue to monitor” the economic outlook “as it assesses the appropriate path of the target range for the federal funds rate,” a statement Fed watchers have interpreted as a sign the bank could hold rates steady for the rest of the year.

{mosads}The FOMC said in a statement that cutting rates now reflects the Fed’s belief that the economy will continue to grow, add jobs and push prices and wages higher, “but uncertainties about this outlook remain.”

Federal Reserve Chairman Jerome Powell explained in a press conference Wednesday that risks had eased as the U.S. and China close in on a partial trade agreement. The chairman added that the Fed believed the current rate range would be “appropriate” to support the economy barring a major downturn.

“If something happens to cause us to materially reassess that outlook, that’s what would cause us to change our views on the appropriate stance of policy,” Powell said. “We don’t see any evidence of that.”

The cut was opposed by two FOMC officials who both preferred to hold rates steady: Esther George, president of the Federal Reserve of Kansas City, and Eric Rosengren, president of the Boston Federal Reserve.

While the Fed was widely expected to cut rates this month, the decision comes amid increasing concern that the central bank could soon run out of weapons to fight a recession. 

The U.S. economy has slowed steadily throughout 2019 after a burst of growth last year. U.S. gross domestic product rose at an annualized rate of just 1.9 percent in the third quarter, while average monthly job gains have fallen from 223,000 in 2018 to 161,000 in 2019.

The upcoming October jobs report, scheduled to be released Friday, is also expected to show paltry employment gains due in part to the 40-day strike at General Motors plants that began Sept. 15.

And business investment in equipment and structures, manufacturing output, and exports have all fallen sharply as fading global growth cuts into foreign demand for U.S goods and services.

Concerns about the souring economic outlook and constant attacks from President Trump boosted pressure on the Fed to cut rates again this month. The president will likely be irked by the Fed’s refusal to zero-out interest rates, which he called a “dereliction of its duties” in a tweet last week.

Trump has bullied the Fed to slash interest rates for more than a year to fuel the slowing economy as he seeks to ride a record stretch of prosperity to reelection. The president is depending on his handling of the economy to woo swing voters in Ohio, Michigan, Pennsylvania and Wisconsin who could be tempted to flip their states back to Democrats in 2020. 

Central bank officials have also expressed concerns that wide swaths of the U.S. have yet to see the full benefits of a decade of economic recovery.

But critics of the Fed’s approach argue that with interest rates already close to stimulatory levels, another rate cut will deprive the Fed of crucial fuel to power the economy through a severe downturn.

Powell tamped down fear that the declines in business investment and expansion would soon cut into a 3.5 percent unemployment rate, a 50-year low. The chairman argued that the consumer-side of the economy has largely been insulated from headwinds challenging businesses.

“The consumer-facing companies that we talked to in our vast network of contacts report that consumers are doing well and are focused on the good job market and rising incomes,” Powell said. “We see the economy as having been resilient to the headwinds that have been blowing this year.”

Consumer spending, which powers 70 percent of the economy, grew at a solid rate of 2.9 percent in the third quarter, though well below a 4.6 percent spike in the second quarter. Residential investment also rebounded from a 3 percent decline in the second quarter to a 5.1 percent increase in the third, boosting the housing sector.

The return of inflation close to the Fed’s 2 percent target has also prompted calls to tap the breaks on rate cuts. Inflation as measured by the Fed’s preferred gauge, the personal consumption expenditure price index minus food and energy, rose by an annualized 2.2 percent in the third quarter.

Powell countered that market expectations of future inflation have weakened, which supports cutting rates to nudge prices gains higher.

“We think the right thing to do is to do what we can now and hold and really move inflation expectations up so that they’re squarely and firmly anchored at a level that’s consistent with 2-percent inflation,” Powell said.

Updated at 3:42 p.m.