US Federal Reserve cuts interest rate for first time in more than...

US Federal Reserve cuts interest rate for first time in more than a decade

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Federal Reserve Chairman Jerome Powell; interest rates cut for the first time in a decade.
Jerome Powell

The US Federal Reserve has cut its key interest rate for the first time in a decade.

The cut aims to counter threats ranging from uncertainties caused by President Donald Trump’s trade wars to chronically low inflation and a dim global outlook.

The Fed also repeated a pledge to “act as appropriate to sustain the expansion” – wording that the financial markets have interpreted as a signal of possible future rate cuts.

The initial reaction in the financial markets was muted. Stocks fell slightly after the Fed issued its statement.

The central bank reduced its benchmark rate – which affects many loans for households and businesses – by a quarter-point to a range of 2% to 2.25%.

It is the first rate cut since December 2008 during the depths of the Great Recession, when the Fed slashed its rate to a record low near zero and kept it there until 2015. The economy is far healthier now despite risks to what has become the longest expansion on record.

In addition to its rate cut, the Fed also said it would stop shrinking its enormous bond portfolio in August, two months earlier than planned.

This step is intended to avoid putting upward pressure on long-term borrowing rates. The Fed had aggressively bought Treasury and mortgage bonds after the financial crisis to drive down long-term rates but had been gradually shrinking its balance sheet as the economy strengthened.

The Fed’s action was approved by an 8-2 vote.

It was the first time there have been as many as two dissents since December 2017 and suggested that chairman Jerome Powell may face opposition if he seeks further rate cuts this year.

Compared with when rates were previously cut more than a decade ago, the economy is now solid by most measures, if not spectacular. Consumers are spending and unemployment is close to a half-century low.

Yet the Fed under Mr Powell has signalled that rising economic pressures, notably from Mr Trump’s trade wars and from weakness in Europe, Asia and elsewhere, have become cause for concern. So has an inflation rate that remains stubbornly below the 2% target level.

So the Fed has decided that a rate cut now — and possibly one or more additional cuts to follow — could provide an insurance policy against an economic downturn.

The idea is that lowering its key short-term rate could encourage borrowing and spending and energise growth. Wall Street has welcomed that prospect with a stock market rally since the start of the year.

A key concern expressed by the Fed is that Mr Trump’s pursuit of trade conflicts, with his punishing tariffs on hundreds of billions of dollars in Chinese and European goods, have escalated uncertainties for American companies. Some companies have put off plans to expand and invest.

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