Sun | May 31, 2020

Divided Fed cuts interest rates

Published:Thursday | September 19, 2019 | 12:26 AM
US Federal Reserve Board Chair Jerome Powell.
US Federal Reserve Board Chair Jerome Powell.

A sharply divided US Federal Reserve cut its benchmark interest rate Wednesday for a second time this year, but declined to signal that further rate cuts are likely this year.

The Fed’s move reduced its key short-term rate – which influences many consumer and business loans – by an additional quarter-point to a range of 1.75 per cent to two per cent.

The action was approved 7-3, with two officials preferring to keep rates unchanged and one arguing for a bigger half-point cut. The divisions on the policy committee underscored the challenges for Chairman Jerome Powell in guiding the Fed at a time of high economic uncertainty.

The Fed did leave the door open to additional rate cuts – if, as Powell suggested at a news conference, the economy weakens. For now, he suggested, the economic expansion appears durable in its 11th year, with a still-solid job market and steady consumer spending.

At the same time, the Fed is trying to combat threats, including uncertainties caused by United States President Donald Trump’s trade war with China, slower global growth and a slump in American manufacturing. The Fed noted in its statement that business investment and exports have weakened.

At his news conference, Powell acknowledged that Fed officials are sharply divided about the wisest course for interest rates, especially given uncertainties, like trade conflicts, whose outcomes are out of the Fed’s control.

“This is a time of difficult judgements and disparate perspectives,” the chairman said.

In any case, many business leaders are sceptical that the Fed’s slight rate cuts will deliver much economic benefit.

Wednesday’s rate cut “makes virtually no difference to the US economy in and of itself,” said Jamie Dimon, CEO of JPMorgan Chase, who suggested, as many corporate leaders have, that Trump’s trade war remains an overarching threat.

“I don’t think cutting rates will offset trade, personally,” said Dimon, head of the largest US bank.

Among Powell’s challenges is that the trade war’s uncertainties are likely affecting the nation’s economic data, making it hard for the Fed to set an interest-rate policy for the months ahead.

“It doesn’t make sense to commit to a path of policy today when monetary policy is now responding to future developments in the trade policy,” said Bill Adams, a senior economist at PNC Financial Services.

Wednesday’s modest rate cut irritated Trump, who has attacked the central bank and insisted that it slash rates more aggressively.

“Jay Powell and the Federal Reserve Fail Again,” Trump tweeted. “No ‘guts,’ no sense, no vision! A terrible communicator!”

Updated economic and interest rate forecasts issued Wednesday by the Fed show that only seven of 17 officials foresee at least one additional rate cut this year. And at least two Fed officials expect a rate hike next year.

None of the policymakers foresee rates falling below 1.5 per cent in 2020 – a sign that the turbulence from a global slowdown and Trump’s escalation of the trade war is viewed as manageable.