First cut by Fed in more than 10 years welcomed
The Federal Reserve lowered its benchmark rate by a quarter point Wednesday as an insurance policy not against what’s wrong with the economy now, but what could go wrong in the future. It was the first rate cut by the central bank in more than a decade, according to a statement released by the Federal Open Market Committee (FOMC) on Wednesday.
The FOMC said that information received since the Committee’s meeting n June indicated that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.
On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
In the release, the FOMC noted that in line with its statutory mandate, the Committee was seeking to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee thus decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. 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, with a strong labor market and inflation near its symmetric 2 per cent objective.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 per cent.
The stock market dove later in the afternoon when Fed Chair Jerome Powell noted that the cut was simply a “mid-cycle adjustment” and that the committee did not see the type of marked economic weakness that would necessitate a longer rate-cutting cycle, according to CNBC reported