Fed cuts rates for the first time since 2008 amid global fears

Pedro Gonçalves
Fed cuts rates for the first time since 2008 amid global fears

The US Federal Reserve has cut interest rates by 25 basis points to between 2% and 2.25%, marking the first time that interest rates have been cut since the financial crisis, to help stave off the possibility of an economic downturn.

The central bank is hoping a rate cut will be the necessary injection to keep the US economy healthy, especially because it has limited ammunition to respond to a downturn with historically low interest rates.The Fed also announced plans to end the reduction of its $3.8trn asset portfolio, effective August 1, two months earlier than previously expected. The runoff was set to end after September.

The central bank's Federal Open Market Committee said it was ready to "act as appropriate to sustain the expansion", hinting at more rate cuts in the future, and paired the move with a decision to halt the reduction in the Fed's balance sheet two months earlier than planned.

Fed chairman Jerome Powell said "weak global growth, trade policy uncertainty and muted inflation" had prompted the major shift in policy.

But comments by Powell at a press conference, spooked investors by suggesting that the FOMC would take a more cautious approach to easing than they had expected.  He described the move as "a mid-cycle adjustment to policy," suggesting that sharp further cuts were unlikely.

Analysts cited the lack of a clear intention by the Fed to initiate further cuts - something US president Donald Trump has demanded of policymakers this year.

A few hours after the Fed chair's news conference, Trump tweeted: "As usual, Powell let us down," while giving a nod to the central bank's decision to end quantitative tightening. "We are winning anyway, but I am certainly not getting much help from the Federal Reserve!"

The Fed's rate cut and plans to end quantitative tightening follows months of pressure from president Trump, who has repeatedly rebuked his pick to lead the central bank for not doing enough to boost the US economy.

But Powell said pressure from Trump did not factor in the Fed's decision. We don't conduct monetary policy in order to prove our independence," he said.

"We're thinking of it essentially as a mid-cycle adjustment to policy," Powell said, adding that this had occurred before in Fed history. "I'm contrasting it there with the beginning, for example, the beginning of a lengthy cutting cycle. That's not what we're seeing now. That's not our perspective now, or outlook."

Before the Fed meeting, markets were betting on three more interest rate cuts by the end of 2019. 

Nationwide senior economist Ben Ayers said future policy moves by the Fed would depend upon how the economy and trade talks progress in the coming months.

"Should trade negotiations turn positive and economic data, especially inflation, firm in coming months, July's move could be a one-and-done easing," said Ayers in a note. "Still, given the slowing trajectory for the economy and precedence from previous mid-expansion easing cycles, a further rate cut (or two) by year-end may occur.

Industry unimpressed by not so dovish move

Phil Smeaton, chief investment officer at Sanlam UK, said:"Recent months have seen Powell come under increasing pressure to provide monetary stimulus, with commentators claiming that the US economy is underperforming. But while President Trump might welcome the decision by the Fed to cuts rates for the first time in a decade, what comes next remains uncertain." 

"This decision is not data-led, which is a marked shift for the Fed. US GDP fell below the White House's target of 3%, coming in at 2.5%, but with unemployment at a 50 year low the US continues to set the pace for its global competitors. With the President on an election footing, an economic boost would certainly help his campaign. But significant inflationary risks remain, not least the failure to resolve the trade wars. While the rate cut may satiate the White House for now, it will surely not be long till Powell is once again in the crosshairs. Yet the Fed will resist pressure for an extended period of monetary expansion."