U.S. Federal Reserve on Wednesday lowered interest rates for the second time this year amid growing risks and uncertainties stemming from trade tensions and a global economic slowdown.
The Federal Open Market Committee (FOMC), the Fed’s rate-setting body, trimmed the target for the federal funds rate by 25 basis points to a range of 1.75 percent to 2 percent after concluding its two-day policy meeting, following a rate cut in late July that was its first in more than a decade.
Trade policy uncertainty
Despite strong labor market and robust growth in household spending, “business fixed investment and exports have weakened,” the FOMC said in a statement.
“On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent,” the central bank’s inflation objective, it said.
“The main reasons appear to be slower growth abroad and trade policy developments — two sources of uncertainty that we have been monitoring all year,” Fed Chairman Jerome Powell told reporters at a press conference Wednesday afternoon.
“Trade policy tensions have waxed and waned, and elevated uncertainty is weighing on U.S. investment and exports,” said the U.S. central bank chief, who also noted that monetary policy can counteract weakness to some extent, but “there’s a piece of this that we really can’t address.”
“We need to look through what’s a pretty volatile situation,” said Powell. “That means, not overreacting quickly, it means not underreacting too. That’s what we’re trying to do.”
Bill Dudley, former president of the Federal Reserve Bank of New York, said earlier this month that the central bank needs to be “cautious” that it does not “inadvertently enable the president’s trade war with China.”
U.S. President Donald Trump again lashed out at the central bank shortly after the rate cut announcement, saying in a tweet that “Jay (Jerome) Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!” The president has repeatedly demanded a larger cut.
In response to a question regarding Trump’s comment, Powell reaffirmed the central bank’s independence. “I assure you that my colleagues and I will continue to conduct monetary policy without regard to political considerations. We’re going to use our best judgment based on facts, evidence and objective analysis in pursuing our goals,” he said.
Growing divide within Fed
Three of the 10 members of the committee voted against the quarter-point rate cut decision, highlighting growing split among monetary policymakers. “The last time we saw three dissenting votes occurred in September 2016,” said Diane Swonk, chief economist at Grant Thornton, a major accounting firm.
As in July, Federal Reserve Bank of Boston President Eric Rosengren, and Kansas City Fed President Esther George “preferred” to maintain the target range for the federal funds rate at the previous level. St. Louis Federal Reserve President James Bullard, meanwhile, demanded a larger cut, by 50 basis points.
When asked about how he viewed the divided opinions, Powell said at the press conference that this is difficult judgement, and such divisions are “nothing but healthy.”
