This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.nytimes.com/2019/10/30/business/economy/federal-reserve-interest-rates.html

The article has changed 6 times. There is an RSS feed of changes available.

Version 3 Version 4
Federal Reserve Cuts Interest Rates for Third Time in 2019 Federal Reserve Cuts Interest Rates for Third Time in 2019
(about 4 hours later)
WASHINGTON — The Federal Reserve cut interest rates Wednesday for the third time this year as slowing business investment, ongoing trade tensions and global weakness continued to weigh on the American economy. WASHINGTON — The Federal Reserve cut interest rates on Wednesday for the third time this year, reversing nearly all of 2018’s rate increases as uncertainty from President Trump’s trade war and slowing global growth continue to pose risks to the United States economy.
But the Fed signaled that it will pause and assess incoming data before it considers lowering borrowing costs again. Fed Chair Jerome H. Powell said that while “there’s plenty of risk left,” some of it has subsided, pointing to the potential for a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union. The decision to cut rates by another quarter point despite rock-bottom unemployment and decent overall growth shows the extent to which Mr. Trump’s hot-and-cold trade war, paired with a tenuous global outlook, has put the Fed on the defensive. While the central bank was on a steady march to raise rates just a year ago, it has spent the past several months trying to insulate the American economy against those threats and keep a record expansion humming.
“Overall, we see the economy as having been resilient to the winds that have been blowing this year,” he said. Wednesday’s decision to cut rates for a third time was made “to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.” On Wednesday, officials signaled that they would pause to assess incoming data before they considered lowering borrowing costs again, in part because of a potential easing of trade tensions.
The Fed’s move to lower rates to a range of 1.5 to 1.75 percent was not unanimous and the two officials who voted against both previous cuts dissented once again. The Fed chair, Jerome H. Powell, said that while “there’s plenty of risk left,” there are signs that some challenges are subsiding, including the possibility of a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union.
Fed officials cut rates in both July and September, and they have likened their recent moves to taking out insurance. Although the economy is holding up — growth remains near potential, consumers are spending and the unemployment rate is at a half-century low — central bankers are trying to inoculate the economy against any future slowdown. This week’s decision to lower rates was intended to “provide some insurance against ongoing risks,” Mr. Powell said, adding that the United States economy remains strong. “Over all, we see the economy as having been resilient to the winds that have been blowing this year,” he said.
While risks to the outlook remain, the Fed suggested Wednesday that it is now shifting into a more patient mode. The central bank dropped a key line from its post-meeting statement in which it pledged to “act as appropriate to sustain the expansion,” language it had been using to signal a willingness to lower interest rates. The decision to lower rates to a range of 1.5 to 1.75 percent was not unanimous. Two policymakers who voted against this year’s previous cuts dissented once again.
“The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate,” the Fed’s statement said, explaining that while the Fed expects to hit its inflation and employment goals, “uncertainties about this outlook remain.” Fed officials had previously cut rates in July and September, likening those moves to taking out insurance. Although the economy is holding up — growth remains near potential and consumers are spending — they wanted to inoculate the economy against the harmful effects of uncertainty and slowing global demand, which have included diminished business investment and manufacturing weakness.
The Fed has now cut its policy rate by a cumulative 0.75 percentage point this year, just as it did during two mid-business cycle interest rate adjustments in the 1990s. Because central bank policy changes act on the economy with a lag, some officials have indicated that they would like to see how incoming data shape up before making further adjustments. But officials signaled that the Fed was shifting to a more patient mode. It dropped a key line from its post-meeting statement in which it pledged to “act as appropriate to sustain the expansion,” language it had been using to signal a willingness to lower interest rates. Mr. Powell backed that up during his subsequent news conference, making it clear that the Fed would need to see economic deterioration before cutting interest rates again.
Mr. Powell said that while trade tensions have “weighed” on the economy, along with slowing global growth, the Fed expects the economy to expand at a “moderate” rate and that the job market remains “strong.” He said consumer spending remains strong, despite volatility in other sectors. “We see the current stance of policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook,” Mr. Powell said. “If developments emerge that cause a material reassessment of our outlook, we would respond accordingly.”
“What we’ve had is an economy where the consumer is really driving growth,” he said. The Fed has now reduced its policy rate by a cumulative 0.75 percentage point this year, just as it did during two mid-business-cycle interest rate adjustments in the 1990s. While those insurance cut cycles were eventually reversed — the Fed returned to interest rate increases — Mr. Powell indicated that increases were not on the table unless inflation showed signs of moving higher. Price gains have been falling short of the Fed’s 2 percent target for years, making that unlikely.
Mr. Powell suggested the Fed was once again in a wait-and-see mode and that policymakers would watch incoming data to see whether another cut was warranted. Inflation “seems to be settling in below 2 percent, so we really don’t see that risk,” Mr. Powell said. “We’re not thinking about raising rates right now.”
“Policy is not on a preset course,” he said. “We see the current stance of policy as likely to remain appropriate” as long as incoming information remains “broadly consistent with our outlook.” The Fed lifted rates four times in 2018 — and had raised them nine times in total starting from late 2015 — as the economy strengthened. Officials believed that strong consumer demand and a tight labor market would eventually push inflation up, and wanted to get ahead of that. As prices failed to accelerate, officials put interest rates on pause.
The primary factor that would cause the Fed to act again, he said, is if “developments emerge” that would cause the Fed to “materially reassess” its outlook. By this summer, Mr. Trump’s trade war had helped to force the Fed into a more active mode. It has now reversed most of last year’s increases, helping to lower mortgage rates and other consumer borrowing costs and adding oomph to growth.
The Fed lifted rates four times in 2018 as the economy strengthened, partly because of Mr. Trump’s 2017 tax cuts and higher government spending. It has now reversed most of those moves amid a slowing economy. But the moves are unlikely to satisfy Mr. Trump, who has been pressing the central bank to slash rates for more than a year and has said the Fed should cut rates to zero or below. He often couches his calls for cheaper borrowing costs in competitive terms, comparing the United States’ monetary policy to that in Europe, where the economy is weaker and a key policy rate is negative.
But that is unlikely to satisfy Mr. Trump, who has been urging the central bank to slash rates for more than a year and recently said the Fed should cut rates to zero or below. Mr. Trump said in a tweet earlier this month that the central bank would be “derelict” in its duties if it failed to lower rates further. He often couches his calls for cheaper borrowing costs in competitive terms, comparing the United States’ monetary policy to that in Europe, where the economy is weaker and a key policy rate is negative. Much-lower interest rates could bolster stock prices and give the economy a lift headed into the 2020 election, which would be good news for Mr. Trump. Absent any help, most economists expect that growth will gradually decline to just below 2 percent, as the short-term benefits of Mr. Trump’s 2017 tax cuts and higher government spending fade.
The Fed has the task of maintaining maximum employment and stable inflation, and it does so primarily by lowering or raising borrowing costs to stoke or slow borrowing and spending. It is currently working against a complicated economic backdrop. That could be problematic for the president, who promised to coax growth to 3 percent or more, well above the level economists see as sustainable given current demographic and productivity trends.
Unemployment is historically low, the labor market is expanding and consumer spending is strong. But job gains are cooling off, wage growth has shown early signs of weakening and consumer sentiment is slipping. The Fed has insisted that it is independent of the White House and will set policy with an eye on the economy, not the political cycle. Congress has given the Fed two goals, maintaining maximum employment and stable inflation, but freedom in how it achieves them. It does so primarily by changing borrowing costs to stoke or slow borrowing and spending.
But it is currently making policy calls against a complicated economic backdrop.
The Fed has failed to sustainably hit its 2 percent inflation target since formally adopting it in 2012, and various measures of consumer and market inflation expectations have recently drifted lower. That creates a risk that price increases will become mired permanently below the central bank’s goal, leaving it with less room to cut interest rates — which include inflation — in a downturn.The Fed has failed to sustainably hit its 2 percent inflation target since formally adopting it in 2012, and various measures of consumer and market inflation expectations have recently drifted lower. That creates a risk that price increases will become mired permanently below the central bank’s goal, leaving it with less room to cut interest rates — which include inflation — in a downturn.
Overall economic growth is also slowing from a stronger pace in 2018 and early 2019, a Commerce Department report showed earlier Wednesday, though it remains close to the Fed’s estimate of its longer-run potential. That is consistent with what the policymakers expected: They have long believed that the economy would slow down once the effects of Mr. Trump’s tax cuts and higher government spending had played out.Overall economic growth is also slowing from a stronger pace in 2018 and early 2019, a Commerce Department report showed earlier Wednesday, though it remains close to the Fed’s estimate of its longer-run potential. That is consistent with what the policymakers expected: They have long believed that the economy would slow down once the effects of Mr. Trump’s tax cuts and higher government spending had played out.
Still, stock prices are soaring, and the housing market has stabilized as mortgage rates have fallen. While it is not obvious how or even whether the trade war will end, Mr. Trump has said that negotiators are making progress toward a first-phase deal with China. But stock prices are soaring, and the housing market has stabilized as mortgage rates have fallen. While it is not obvious how or even whether the trade war will end, Mr. Trump has said that negotiators are making progress toward a first-phase deal with China.
Those hopeful signs could help the economy find a more solid footing. Some officials are also wary of stoking asset price bubbles and unhealthy risk-taking by lowering interest rates too much and too early. Mr. Powell avoided tying the outlook for monetary policy too closely to the success or failure of those negotiations.
Both Esther George, the president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, the president of the Federal Reserve Bank of Boston, voted against Wednesday’s rate cut. They have both previously dissented against the rate cuts, saying that they would prefer to see a more pronounced deterioration in economic data before lowering rates. “That’s one factor among many, many factors that factor into our assessment of the outlook,” Mr. Powell said of the potential for trade resolution.
Interest rate changes do not filter through the economy immediately, so officials want to see how their recent stimulus plays out in economic data. Some officials are also wary of stoking asset price bubbles and unhealthy risk-taking by lowering interest rates too much and too early.
Both Esther George, the president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, the president of the Federal Reserve Bank of Boston, voted against Wednesday’s rate cut. They have both previously dissented, saying that they would prefer to see a more pronounced deterioration in economic data before lowering rates.
James Bullard, the president of the Federal Reserve Bank of St. Louis, had dissented in favor of a larger rate cut in September, but voted in favor of October’s quarter-point adjustment.James Bullard, the president of the Federal Reserve Bank of St. Louis, had dissented in favor of a larger rate cut in September, but voted in favor of October’s quarter-point adjustment.
The Fed next meets Dec. 10-11. Between now and then, investors will focus on what constitutes a “material” weakening, one that is sufficient to drive the Fed to lower rates again.
“Retaining some constructive ambiguity and optionality at this stage is likely prudent,” Michael Gapen, an economist at Barclays, wrote in a note after Wednesday’s meeting.