Fed Cuts Rate for 3rd Time This Year, Signals Pause in Reductions

October 30, 2019 Updated: October 31, 2019

WASHINGTON—The Federal Reserve cut its benchmark federal funds rate on Oct. 30 for the third time this year to sustain U.S. economic expansion in the face of a global slowdown and ongoing trade risks that weigh on business confidence.

After its two-day policy meeting, the U.S. central bank decided to slash its target interest rate by 25 basis points to a range of 1.50 percent from 1.75 percent. Then it signaled that the current cycle of lowering rates could be over.

A statement of the Federal Open Market Committee reflected a robust labor market and moderate economic growth.

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

The policymakers removed the language used in previous statements that said the committee would “act as appropriate to sustain the expansion.”

Instead, they replaced it with a milder statement: “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.”

This year, the Fed made three rate reductions totaling 75 basis points.

In his opening remarks at a press conference, Federal Reserve Chairman Jerome Powell said that the committee believed “monetary policy is in a good place.”

“Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course,” he said.

He noted that the weakness in global growth, trade tensions, as well as “muted inflation pressures” have led the Fed to lower rates.

According to Powell, the phase one trade agreement with China has the potential to reduce trade tensions and uncertainty, which could boost business confidence and “perhaps activity over time.”

Stocks turned positive after Powell’s speech, with the Dow Jones Industrial Average closing the day 0.4 percent higher. S&P 500 also rose 0.3 percent.

The federal funds rate refers to the interest rate that banks charge each other for overnight lending, but it influences borrowing costs of all types of loans, including mortgages, auto loans, and student loans.

Two of 10 Fed officials dissented from the rate-cut decision, preferring to maintain the rates steady. These two officials disapproved of the rate cuts in the Fed’s July and September meetings as well.

Consumers Support the Economy

Powell said the consumer sector continues to be strong as witnessed in the third quarter economic growth data published on Oct. 30.

The U.S. economy grew at 1.9 percent in the third quarter, beating estimates. Weakness in business investment was offset by resilient consumer spending, which accounts for 70 percent of economic activity.

Powell said the Fed’s monetary policy has supported “household spending and home buying by keeping the labor market strong, keeping workers’ income rising, and keeping consumer confidence at high levels.”

President Donald Trump has long been critical of the central bank. In recent months, he stepped up his pressure on policymakers after central banks around the world started to adopt deeper negative interest-rate policies.

In a recent tweet, Trump wrote that the “Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate.”

“Take a look around the World at our competitors,” he said. “Germany and others are actually GETTING PAID to borrow money. Fed was way too fast to raise, and way too slow to cut!”

The European Central Bank announced a new stimulus program last month, cutting its benchmark interest rate to a record low of minus 0.5 percent. It also restarted its 2.6 trillion euro ($2.90 trillion) quantitative easing program of bond buying.

Beth Ann Bovino, the chief U.S. economist at Standard & Poor’s, told The Epoch Times that the United States can hold onto higher interest rates relative to its peers.

She said on Oct. 18 that the U.S. “economy is holding up relatively well, and the problems abroad and in manufacturing have not filtered into the domestic side of the equation.”

“It looks like the United States economy can withstand and still prosper [with relatively high interest rates],” Bovino said.

Follow Emel on Twitter: @mlakan
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