US Federal Reserve cuts benchmark rate

Washington: The US Federal Reserve on Wednesday cut its benchmark interest rate by a quarter-percentage point to a target range of between 2-2.25 per cent.

The widely expected move marks the first reduction in the federal-funds rate since the 2008 financial crisis, the Efe news reported.

The central bank said US economic activity has been rising at a moderate rate, job gains have been solid and the unemployment rate has remained low, but it justified its decision by citing “muted inflation pressures” and “implications of global developments for the economic outlook.”

Fed Chairman Jerome Powell had strongly hinted earlier this month that the benchmark rate would be lowered at the July meeting of the Federal Open Market Committee due to persistent trade tensions, global weakness and a notable slowdown in business investment.

The FOMC, a policy-making body chaired by Powell, voted 8-2 in favour of the monetary policy action after a two-day meeting, with the two dissenters being Eric Rosengren, President and CEO of the Federal Reserve Bank of Boston; and Esther George, President and Chief Executive of the Federal Reserve Bank of Kansas City.

Rosengren and George both wanted the federal-funds rate kept at a target range of 2.25-2.5 per cent.

The latest data point to economic deceleration in the US, Europe and China.

US gross domestic product expanded at a 2.1 per cent clip in the second quarter, down from a 3.1 per cent growth rate in the first quarter.

The US inflation rate for the 12 months ended June 2019, meanwhile, fell two-tenths of a percentage point from May to 1.6 per cent, and the annual inflation rate has persistently remained below the Fed’s target annual inflation rate of 2 per cent.

The inflation rate came in at 2.9 per cent for the 12 months ended June 2018.

“The outlook for the US economy remains favourable, and this action is designed to support that outlook,” Powell said in a news conference after the monetary policy action.

“It is intended to insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are currently having on the economy and to promote a faster return of inflation to our symmetrical 2 per cent objective,” he added.

US President Donald Trump, who is seeking higher US economic growth ahead of his re-election bid next year, in recent months has repeatedly pressed the Fed to lower interest rates and thus make it cheaper for businesses and consumers to borrow money.

He also has criticised the Fed for raising interest rates four times in 2018, while the central bank said it was returning its target federal-funds rate to a historically normal level after it had been held at near zero following the 2008-2009 global recession.

“The EU and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product,” Trump tweeted on Monday.

“In the meantime, and with very low inflation, our Fed does nothing – and probably will do very little by comparison. Too bad!”

The Fed’s statement indicated it will take a wait-and-see approach ahead of the next FOMC meeting, which is scheduled for September 17-18.

“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.”

At his news conference, Powell said there could be an additional reduction of the federal-funds rate but that Wednesday’s action is “not the beginning of a long series of rate cuts.”

Recalling that the Fed had been raising interest rates in recent years (starting in late 2015), Powell told reporters the FOMC was thinking of the action in terms of a “mid-cycle adjustment to policy.”

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