Fed cuts rates again as economic risks rise

Washington

THE Federal Reserve lowered interest rates by a quarter of a percentage point on Wednesday, its second cut since late July, and suggested that it was prepared to move aggressively if the United States' economy showed additional signs of weakening.

For now, a growing number of Fed officials expect one more cut this year, based on economic projections released after the Fed's two-day meeting. But a murky economic outlook and a division within the Fed's policy-setting committee prevented a clear message about what comes next.

Jerome Powell, the Fed chair, said at a news conference after the meeting that the US economy remained strong and unemployment low, but that "there are risks to this positive outlook". If the economy weakens, he said, a "more extensive sequence" of rate cuts could be appropriate.

"Our eyes are open, we're watching the situation," Mr Powell said, explaining that the Fed would stop cutting rates to sustain the expansion only "when we think we've done enough".

"There may come a time when the economy weakens and we would then have to cut more aggressively," he continued. "We don't know. We're going to be watching things carefully, the incoming data and the evolving situation."

The Fed's announcement on Wednesday did little to appease President Donald Trump, who has been pushing the central bank to cut interest rates to zero - or even into negative territory. The Fed's policy interest rate is now set in a range of 1.75 to 2 per cent, and not a single official sees it falling lower than 1.5 to 1.75 per cent through the end of 2022.

"Jay Powell and the Federal Reserve Fail Again," Mr Trump said in a tweet shortly after the Fed's announcement. "No 'guts,' no sense, no vision! A terrible communicator!"

Stocks initially fell on the Fed's announcement. But they ended slightly higher on the day, and Treasury yields barely moved, suggesting that the Fed's decision and communication were roughly in line with investor expectations.

Uncertain outlook

Fed officials are keeping their options open because they face an uncertain outlook. Businesses are hiring and consumers are spending, but Mr Trump's trade war and prospects of an unruly British withdrawal from the European Union have markets on edge. Inflation has been stuck below the Fed's 2 per cent annual target, giving officials room to lower rates without worrying about runaway price gains.

"Since the middle of last year, the global growth outlook has weakened," Mr Powell said. "Trade policy tensions have waxed and waned," and "elevated uncertainty" is weighing on business investment and exports, he said.

Given those risks, momentum has shifted towards further accommodation. While the median Fed official expects rates to stay at the current level through the end of the year, seven of 17 expect another rate cut.

Not a single official expected three rate cuts in 2019 when the central bank last released economic projections in June.

The decision to lower borrowing costs twice in three months is itself a significant pivot for the central bank, which raised rates four times in 2018 and planned to be "patient" on rate moves as recently as March.

Mr Powell said the change in the Fed's policy stance over the course of the year was "the main takeaway". And in its official statement after its meeting, the committee again pledged to "act as appropriate to sustain the expansion".

But against a complicated economic backdrop, officials are increasingly divided. Three members of the rate-setting Federal Open Market Committee dissented in this month's vote, the most 'no' votes at a single meeting since 2016.

James Bullard, the president of the Federal Reserve Bank of St Louis, wanted a bigger cut. Esther George, who heads the Federal Reserve Bank of Kansas City, and Eric Rosengren, who heads the Federal Reserve Bank of Boston, thought that the central bank should keep borrowing costs steady. Ms George and Mr Rosengren also voted against the July rate cut.

Difficult judgments

Mr Powell acknowledged those divisions, calling it "a time of difficult judgments" and adding that the bulk of the committee was assessing the economy "meeting by meeting".

Mr Powell also pushed back on Mr Trump's recent call for the Fed to slash rates below zero, saying that such an idea was rejected during the height of the 2008 financial crisis and would not be high on the list of options if the economy worsened. If the Fed is forced to cut interest rates back to rock bottom, he said, it will again turn to bond-buying programmes to provide added stimulus.

"I do not think we would be looking at using negative rates," he said.

Meanwhile, the Fed has struggled to coax inflation up to its 2 per cent goal. The central bank aims for steady inflation that is low enough to allow for consumer comfort but high enough to leave policymakers extra headroom to cut interest rates, which include price gains, during a downturn.

Inflation came in at 1.6 per cent in July, based on the Fed's preferred gauge, and has been mired below its target for years.

Inflation expectations, as measured by one New York Fed survey, have slipped both in the short- and longer-term. If growth should take a hit, it could make it hard for the central bank to ever achieve higher price increases, hurting its credibility.

The Fed also addressed several days of wild activity in an important corner of financial markets at its meeting.

The overnight rate on Treasury repurchase agreements, which are short-term loans used by financial institutions like hedge funds and banks, surged at the start of the week amid a shortage of dollars.

Several factors seemed to contribute to the spike, including corporate tax payments and recent government bond issuance that sopped up cash. The Fed was until recently shrinking its balance sheet, which probably also contributed to the crunch.

Officials made a technical tweak to interest rates on Wednesday to keep the fed funds rate, which has been creeping up on the back of the gyrations, anchored within its range.

At the same time, it directed the Federal Reserve Bank of New York's trading desk to execute open market transactions as necessary and "until instructed otherwise", to keep the funds rate from rising above the Fed's target. NYTIMES

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