The Federal Reserve reduced the benchmark interest rate Wednesday for the first time in more than a decade, lowering the rate by a quarter-point in an effort to strengthen the U.S. economy as global head winds mount. But the Fed sowed confusion about what it plans to do next.
The central bank reduced the benchmark rate -- which affects many loans for households and businesses -- to a range of 2% to 2.25%. It's the first rate cut since December 2008 during the depths of the recession, when the Fed slashed its rate to a record low near zero and kept it there until 2015. The economy is far healthier now despite risks to what's become the longest expansion on record.
Stocks fell sharply during Fed Chairman Jerome Powell's news conference shortly after the rate-cut announcement. The Dow Jones industrial average shed 333 points, or 1.1%, after Powell said this was not "the beginning of a lengthy cutting cycle," suggesting there would be only another cut or two after this. The yield on the 10-year Treasury note fell to 2.01% from 2.06% late Tuesday, a sharp drop.
"Let me be clear. What I said was it's not the beginning of a long series of rate cuts," said Powell. "What we are seeing is that it is appropriate to adjust policy to a somewhat more accommodative stance over time."
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In addition to the rate reduction, the Fed announced that it would stop selling off its $3.8 trillion assets in August, two months earlier than expected, in another easing move. The step is intended to avoid putting upward pressure on long-term borrowing rates.
The Fed bought a large amount of Treasury bonds and mortgage-backed securities in the aftermath of the financial crisis to keep interest rates low. The central bank started to sell some of its holdings in recent months because it did not think that extra stimulus was necessary anymore. Now the Fed is putting this on hold.
President Donald Trump blasted Powell on Twitter Wednesday afternoon for not going far enough, the latest in his ongoing attacks on the Fed that began last summer even though the president appointed the majority of the Fed's leadership board, including Powell.
"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," Trump tweeted.
Trump and Wall Street investors have been calling for large interest rate cuts by the end of the year. Powell refused to promise that Wednesday and left it unclear how much more stimulus the Fed is willing to inject.
Powell is facing sharp criticism on multiple fronts with Trump threatening to demote him from Fed chairman -- a move that would be unlikely to stand up in court, Wall Street pushing for more cuts and members of the Fed's policy-setting committee disagreeing with him.
Two out of 10 members of the Fed's rate-setting committee dissented Wednesday because they think the economy is healthy enough that it doesn't need extra stimulus. Boston Fed President Eric Rosengren and Kansas City Fed President Esther George said rates should be left unchanged.
Investors appear to agree with Trump that the Fed should do more to counteract slowing growth overseas and Trump's trade war.
"So far, financial markets clearly believe the Fed hasn't done enough to alleviate concerns," said Guy LeBas, chief fixed-income strategist at the Janney financial firm.
Powell characterized the U.S. economy as "positive" and said most of the problems are coming from overseas. He specifically mentioned Europe and China, but he was careful not to openly criticize Trump's trade war.
"There is really nothing in the U.S. economy that presents a prominent near-term threat .... There is no segment or sector that is really boiling over," Powell said. "Downside risks are really coming from abroad."
Some economists have questioned why the Fed is stimulating growth at a time when the economy looks solid, if not strong.
"I would not cut interest rates," said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA. "Cutting interest rates at this juncture will do only one thing: It will add to additional financial market inflation, which is the last thing in the world the Fed should be doing."
The last time the Fed cut rates, the stock market had shed a third of its value in a matter of weeks, and unemployment was over 7 percent. Today the economy is widely viewed as healthy, with unemployment at a half-century low, stocks at record highs and inflation remaining modest.
Inflation has run shy of the Fed's 2% goal since the central bank formally adopted it in 2012. A little inflation helps to grease the wheels of a healthy economy, allowing businesses to raise wages faster and lifting interest rates, giving the central bank more room to cut in the event of a downturn.
Prices picked up just 1.6% in the year through June, not counting volatile food and fuel costs.
Fed leaders have characterized this rate reduction as an "insurance" cut to enhance the economy's strength in the face of growing problems abroad that could spill over into the United States. The Fed pointed to "soft" business investment and low inflation as signs of potential weakness in the economy.
In delivering the Fed's semiannual monetary report to Congress this month, Powell noted that the central bank needs to prevent the economy from sinking into a low-inflation trap like the one that has bedeviled Japan's economy for more than two decades. Ultra-low inflation can slow growth by causing consumers to postpone purchases, which, in turn, slows consumer spending, the economy's main fuel.
Some White House officials had hoped that a series of interest rate cuts by the Fed in the second half of this year would lead to a rebound in growth, boosting the economy before next year's November elections. But Powell's remarks Tuesday, combined with cloudy outlooks for a number of trade fights, could give businesses pause before they resume investments.
Scholars and business leaders say Fed independence is a bedrock foundation for the economy and financial markets, and there is some concern the Fed might be caving to Trump's demands.
"I think Powell did this to push back on the White House and signal the Fed's independence," said Kristina Hooper of Invesco. "I believe that in Powell's mind, a short-term sell-off was a small price to pay to assert the Fed's right to self-determination."
The president has recently nominated several candidates to the Fed's board who share his low-rate views, although the Senate has not confirmed any of them.
Information for this article was contributed by Heather Long, Thomas Heath and Damian Paletta of The Washington Post; by Martin Crutsinger of The Associated Press; and by Jeanna Smialek of The New York Times.
A Section on 08/01/2019