The Federal Reserve cut interest rates for the first time since 2008 on Wednesday, reducing the federal funds rate by 25 basis points to a range between 2% and 2.25%.
The 25 basis-point rate cut was the consensus forecast in the market, though some market observers, including President Donald Trump, were pushing for a 50 basis-point cut.
The decision by the Fed’s policymaking Federal Open Market Committee was not unanimous. Two of the voting members, Kansas City Fed President Esther L. George and Boston Fed President Eric S. Rosengren, dissented.
The Fed also announced it will be ending the strategy of drawing down its balance sheet a month earlier than it had previously telegraphed, as of Aug. 1 instead of Sept. 1.
Kathy Jones, fixed income strategist at Schwab, said the earlier end to the balance sheet shrinkage makes sense because the strategy, which is essentially a tightening policy, is at odds with lowering rates, an easing stance.
Market reaction to the Fed rate cut was muted at first because 25 basis points was expected, but an hour after the cut was announced the Dow Jones industrial average was off more than 250 points and the S&P 500 down 32 points — both down about 1% since the previous close. Treasury yields rose slightly.
In announcing its first rate cut since the Great Recession, the Fed noted that even though “job gains have been solid … growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft” and “on a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2% [and] “longer-term inflation expectations are little changed.”
The statement also mentioned “implications of global development for the economic outlook” contributing to its decision to reduce rates and “uncertainties” about its economic view.
Jones said the Fed statement leaves open the door to more rate cuts.
In his press conference following the Fed policy announcement, Fed Chairman Jerome Powell said the rate cut was a “mid-cycle adjustment to policy,” moving from raising rates last year, to pausing this year and to today’s cut.
“The committee is thinking of this as a way of adjusting policy to a more accommodative stance to insure against downside risk, support the economy and support inflation.”
Powell noted that weak global growth and trade tensions are having an effect on the U.S. economy.
“Trade is unusual,” said Powell noting that the Fed does not have a lot of experience responding to global trade tensions which “seem to be having significant effect on market conditions.”
Looking ahead, Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said Fed officials “remain biased toward easing, although we suspect most of them anticipate less easing than markets are pricing in.” He’s forecasting “just one more easing, in September” but notes “of course that will depend on economic and market developments.”
The Glenmede Trust Co.’s Investment Strategy Team, which includes Jason Pride, chief investment officer of Private Wealth and Michael Reynolds, investment strategy officer, also believes the Fed’s cut Wednesday “sets the stage for another rate cut before year-end and maybe as soon as its next meeting in September, particularly as it states they will ‘act as appropriate to sustain the expansion.’”
Ward McCarthy, chief financial economist at Jefferies, was critical of the Fed’s rate cut. “In our opinion, the Fed will achieve nothing of significance with today’s action, but only temporarily satiate market expectations and possibly satiate the White House Twitter account. Both will want more.”
Maybe so but, Mike Terwilliger, portfolio manager at Resource Alts, says he’s inclined to believe the Fed’s move Wednesday was a “‘one and done’ cut” because “what is weighing on the global economy now is not the cost of capital, but uncertainty related to the trade war. Cutting rates is not going to stimulate global capex as long as the trade war clouds global business.” Unlike McCarthy, he believes “the Fed will be judicious in using its cuts because of their lack of efficacy right now.”