USA interest rates cut for first time in decade

Thursday, 01 Aug, 2019

The quarter-point cut the Fed announced Wednesday was widely expected.

Many of these former officials say it would be wise to stimulate the US economy with slightly lower rates to try to counteract the negative effects of Trump's trade war and weak growth overseas.

Also, the Fed faces the question of how best to maintain its recession-fighting firepower at a time when interest rates are already much lower than they typically are at this stage in the economic cycle.

Odds for a half-point cut rose after he recommended swift policy action if the economy weakens when rates are low, but fell back after the bank later clarified that he was not discussing upcoming policy moves.

President Donald Trump in recent weeks has pressured the Federal Reserve - with a series of bashing tweets - to make a rate cut. Canadian economic growth has shown signs of re-emerging after it almost stalled in late 2018 and early 2019.

"In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee made a decision to lower" rates, the Federal Open Market Committee, led by Jerome Powell, said in a statement following a two-day meeting in Washington.

Former Dallas Fed adviser Danielle DiMartino Booth, former JPMorgan Chase Chief Economist Anthony Chan and James Freeman on the outlook for Federal Reserve policy.

The Fed last raised rates in December but has backed off plans for further tightening. Canada, he said, would prefer a lower loonie to help its exports in a slowing global environment.

The PBOC also hasn't adjusted its benchmark one-year lending rate - a more powerful tool that governs rates across the entire economy - since 2015. Sustained expansion of economic activity and a strong labor market are also the most likely outcomes, the Fed said. It's a telling irony that a president who claims the Fed is damping the benefits of his policies by holding rates too high is providing one of the few reasons for the USA central bank to cut them. Despite the relatively positive growth, exports declined due to the trade war, and that's enough for the Fed to justify cutting rates, according to CNBC. Despite the cut, the Fed reassured investors that the US economy is solid and the labor market remains strong.

"I think there's a good chance the Fed won't be cutting further anytime soon", wrote Dudley in a Bloomberg opinion piece Tuesday where he said it would not be a mistake to cut this week.

He doesn't see any urgency for the Bank of Canada to follow the Fed's lead. "I didn't say it's just one or anything like that", Powell told reporters during a press conference at the conclusion of the Federal Open Market Committee's two-day meeting.

A man rides a bike in front of the Federal Reserve Board building on Constitution Avenue in Washington, U.S., March 27, 2019.

The Fed's move brings its rate to within 50 points of the Bank of Canada's rate, which is now set at 1.75 per cent. Two of Powell's colleagues also dissented, preferring not to cut rates, so they're unhappy for a different reason.

Carolyn Wilkins, the Bank of Canada's senior deputy governor, explained at the time that the USA and Canada were at different points in the economic cycle.

Underlying both questions are uncertainties about just how much the USA economy is likely to slow and how monetary policy should respond. Officials believe that earlier and more aggressive action is needed to ensure that the US doesn't end up like Japan, with interest rates stuck at zero.