Federal Reserve chair Jerome Powell. Photo / Getty Images
Federal Reserve chair Jerome Powell. Photo / Getty Images
The Federal Reserve cut its main interest rate by 25 basis points, the first reduction since the financial crisis, but disappointed investors by calling the move a "mid-cycle adjustment to policy" rather than the start of more aggressive cycle of monetary easing.
The one-notch cut — widely expected by economistsand investors — stemmed from growing concerns among its key officials about "uncertainties" linked to weakness in the global economy and simmering trade tensions.
The central bank's Federal Open Market Committee said it was ready to "act as appropriate to sustain the expansion", hinting at more rate cuts in the future, and paired the move with a decision to halt the reduction in the Fed's balance sheet two months earlier than planned.
But comments by Powell, the Fed chairman, at a press conference, spooked investors by suggesting that the FOMC would take a more cautious approach to easing than they had expected. Before the Fed meeting, markets were betting on three more interest rate cuts by the end of 2019.
"We're thinking of it essentially as a mid-cycle adjustment to policy," Powell said, adding that this had occurred before in Fed history.
"I'm contrasting it there with the beginning, for example, the beginning of a lengthy cutting cycle. That's not what we're seeing now. That's not our perspective now, or outlook."
Adding to hawkish tone from the central bank, two members of the FOMC dissented. Esther George, the president of the Kansas City Fed, and Eric Rosengren of the Boston Fed, said they preferred to keep rates steady instead of cutting.
The S&P 500 of US stocks turned decisively lower during Powell's remarks, ending 1.1 per cent down on the trading day, and the US dollar spiked 0.4 per cent against its peers.
Struggling to read mixed signals in the Fed statement and press conference, US Treasuries were volatile but, after Powell spoke, the yield curve was once again inverted.
The yield on the two-year Treasury was 6.5 basis points higher than on the 10-year, reflecting pessimism that the Fed will further prop up the US economy. An inverted yield curve has preceded every US recession of the past 50 years.
The FOMC cut the target range for the federal funds rate to 2-2.25 per cent and its accompanying statement suggested that a bias towards further easing remained.
"As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion," it said.
But while Powell did hint that at least one more interest rate cut was likely, he did not want to offer more guarantees.
"They are not pre-committing to what they are going to do from here," said Peter Boockvar of Bleakley Advisory Group.
"The door is clearly open but with six weeks until the September meeting, they wanted to give themselves optionality. If the data worsens they will cut but if it stays the same, they could go either way."
Powell indicated further reductions are not guaranteed. Photo / AP
Tiffany Wilding, a US economist at Pimco, said the press conference highlighted Powell's challenge in communicating the path forward with a divided committee. "Today was a compromise," she said.
Since early June, Fed officials had been pointing to an interest rate reduction to buy the US economy some insurance against global economic tremors. Even though unemployment remains near record lows, and consumption has been remarkably resilient, they have worried about other data including a second-quarter slowdown in US growth, weakness in investment, and persistently low inflation, which is running below the Fed's 2 per cent target.
The 25 basis point cut in interest rates disappointed US President Donald Trump, who vociferously pressed the Fed to slash rates more aggressively in the run-up to this week's meeting. In a tweet late on Wednesday, the president said: "What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world. As usual, Powell let us down."
Powell's decision to press ahead with an interest rate cut represents a remarkable turnround compared to the tightening of policy he pursued last year, during his first months in office.
By the very end of 2018, amid signs of a slowdown and a slump in markets, he pressed the pause button on the monetary tightening, and eventually moved towards easing after US-China trade negotiations broke down in May and Trump threatened Mexico with sweeping tariffs on its imports.
The shrinking of the Fed's balance sheet was aimed at bringing the US central bank's holdings closer to its pre-crisis level, after several rounds of bond purchases over the past decade, but it will now end on August 1, not at the end of September.
The Fed also said on Wednesday that it would cut the interest rate it pays banks to keep their excess reserves at the central bank, from 2.35 per cent to 2.10 per cent, another move designed to stimulate lending and pump money into the economy.
At this stage, Fed officials are not expecting a deeper slump in the US economy that would require a much more forceful easing cycle. "The labour market remains strong and . . . economic activity has been rising at a moderate pace," the FOMC said.
The latest median projection from Fed officials for economic growth, published last month, called for 2.1 per cent growth in 2019, followed by 2 per cent in 2020, and 1.8 per cent in 2021. The IMF's latest forecast, released this month, was rosier for the US this year, expecting 2.6 per cent growth, though it predicted that output would slow to 1.9 per cent in 2020.
