Fed Cuts Interest Rates for the First Time Since 2008

Stocks fell after Fed chairman's comments dashed hopes of future rate cuts
July 31, 2019 Updated: August 1, 2019

WASHINGTON—The Federal Reserve announced July 31 that it’s cutting its benchmark federal funds rate for the first time in more than a decade.

As widely predicted, the central bank cut its target interest rate by 25 basis point to a range of 2 percent to 2.25 percent after its two-day policy meeting. Fed rate decisions affect the borrowing costs of consumer loans, such as mortgages, car loans, and student loans.

The Fed dramatically changed its course this year, after increasing the rates four times in 2018 and nine times since the central bank started inching rates up from nearly zero percent in December 2015. The last time the Fed slashed its rates was December 2008, as part of quantitative easing to help stimulate economic growth.

U.S. stocks fell after Fed Chairman Jerome Powell’s comments dashed hopes of future rate cuts.

The Fed chief suggested that the recent rate move was a “mid-cycle adjustment” and “not the beginning of a long series of rate cuts.” Both the Dow Jones Industrial Average and the S&P 500 fell by more than 1 percent on July 31.

Muted Inflation

The statement of the Federal Open Market Committee (FOMC) reflected the slowdown in business investment and muted inflation.

Information received since June “indicates that the labor market remains strong and that economic activity has been rising at a moderate rate,” according to the policy statement.

“Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.”

The statement also recognized that inflation measures are still “running below 2 percent.”

Rather than waiting until the end of September, the Fed said it would maintain a stable balance sheet, ending the runoff of its securities portfolio in August. The Fed policymakers came under fire last year for ignoring market worries that its ongoing program to shrink the central bank’s balance sheet was affecting market liquidity.

The committee sees a favorable U.S. economic outlook, according to Powell.

“Over the year, however, incoming information on global growth, trade policy uncertainty, and muted inflation have led the committee to gradually lower its assessments of the path of policy interest rates that would best support that outlook,” he told reporters after the FOMC meeting.

For potential rate cuts in the future, the Fed chief said they would “monitor the incoming information for the economic outlook and act appropriately.”

In June, Powell signaled openness to cut interest rates. The stock market rallied since the beginning of June as expectations rose for an interest-rate cut. The S&P 500 index rose 10 percent in the past two months, recording a new record high.

“The Fed left the door open to more rate cuts but didn’t commit,” said Greg McBride, senior vice president at Bankrate, a consumer financial services company. “The Fed is perfectly willing to make additional rate cuts to extend the expansion,” he added.

Economic Outlook

The performance of the U.S. economy has been “reasonably good” and close to the Fed’s objectives, according to Powell.

The downside risks to the Fed’s outlook came from weakening global growth and global manufacturing, particularly in the European Union and China, he noted.

Trade tensions had an effect on business confidence, he said, adding that the central bank would monitor trade policy and assess the implications for the outlook.

Gross domestic product (GDP) growth slowed in the second quarter to a 2.1 percent annual rate from 3.1 percent in the first quarter, mostly due to a drop in exports and non-farm private inventories. An important boost to GDP came from consumers, with personal consumption expenditures rising 4.3 percent.

President Donald Trump said in a July 26 tweet that the GDP growth was “not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck. Almost no inflation. USA is set to Zoom!”

Trump has long been critical of the Fed, calling it the biggest problem for the nation’s economy. He began openly criticizing the central bank and its chief in 2018 for increasing interest rates and slowing the economy.

The Fed has raised rates seven times during the Trump administration, with the most recent increase triggering stock market turmoil in December 2018.

In a sharp turn from December’s decision, Fed officials decided to pause their steady campaign of raising rates due to an uncertain outlook for the U.S. and global economy.

Lower interest rates encourage more consumer spending. As interest rates decline, people are more apt to make big-ticket purchases such as houses or cars, said Robert Johnson, chairman and CEO of Economic Index Associates, which tracks the effects of Fed monetary policies.

“Historically, what we’ve found is that in a falling interest rate environment, the best performing sectors have been apparel, retail, and auto.”

Follow Emel on Twitter: @mlakan
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