The Fed Announces Second Rate Cut

Emel Akan
By Emel Akan
September 18, 2019Business News
The Fed Announces Second Rate Cut
A man rides a bike in front of the Federal Reserve Board building on Constitution Avenue in Washington. (Reuters)

WASHINGTON—The Federal Reserve announced Sept. 18 that it would cut its benchmark federal funds rate for the second time this year and signaled “modest adjustments” to the rates going forward.

As widely predicted, the central bank cut its target interest rate by 25 basis points to a range of 1.75 percent to 2.00 percent after its two-day policy meeting. The federal funds rate is a benchmark that influences borrowing costs of all types of loans including mortgages, auto loans, and student loans.

The statement of the Federal Open Market Committee (FOMC) reflected the weakness in business investment and trade.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened,” the FOMC statement said.

Fed Chairman Jerome Powell presented an upbeat view of the economy but emphasized that the Fed would “continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

“The baseline economic outlook remains positive. The projections of appropriate policy show that participants generally anticipate only modest changes in the federal funds rate over the next couple years,” Powell said at a press conference. “Of course, those views are merely forecasts and as always, will evolve with the arrival of new information.”

Powell also emphasized that risks to the positive outlook were “global growth and trade developments.”

U.S. stocks fell after the Fed’s announcement as it failed to give a clear signal on future rate cuts. The markets have priced in further cuts.

President Donald Trump criticized the Fed’s move, tweeting that “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”

Trump on Sept. 11 urged the central bank to cut its benchmark rates to zero or below.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” he wrote.

Liquidity Crunch

Powell also addressed the concerns about the recent liquidity crunch.

The short-term borrowing market was hit by a liquidity shortage early this week, prompting the Fed to inject cash into money markets for the first time in more than a decade. Effective federal funds rate rose above the top of its target range on Sept. 17.

The Fed had to intervene through overnight repurchase operations in order to keep the rate in the target range, Powell said.

“While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy,” he said.

“This upward pressure emerged as funds flowed from the private sector to the Treasury to meet corporate tax payments and settle purchases of Treasury securities.”

From The Epoch Times

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