In Depth

US Federal Reserve announces another interest rate cut

Fed Chair Jerome Powell signals that further cuts are unlikely

The US central bank, the Federal Reserve, announced yesterday that it is cutting US interest rates by 25 basis points for the third time this year, but signalled that the easing of monetary policy would likely be put on hold imminently.

Jerome Powell, the Fed chair, said that the rate cut was in response to a global economy that continues to face perils. However, he added that the potential of a “phase one” US-China trade deal, as well as the reduced risk of a no-deal Brexit, had reinforced thinking that continued monetary easing may not be necessary.

“We believe that monetary policy is in a good place,” Powell said. “We took this step to help keep the economy strong in the face of global developments and to provide some insurance against ongoing risks,” he said.

The Fed, he said, would cut its key overnight lending rate by a quarter of a percentage point, to a target range of 1.50% to 1.75%.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” said Powell.

Markets focused on an official statement accompanying Powell’s news conference, in which a crucial phrase, which dropped the assertion that it would “act as appropriate to sustain the expansion” - a line that is taken to imply continued rate cuts. Instead, it said it would “assess the appropriate path” for rates, indicating that investors believed the Fed would pause easing for now.

“It’s pretty much what was expected,” said Jim Powers, director of investment research at Delegate Advisors. “The more important outcome is they removed the phrase ‘act as appropriate.’ It looks like the market is taking that to mean that there will be a pause in the declining rate path they were on beforehand. That’s what was expected, and that’s generally a good thing.”

Ron Temple, head of US equities at Lazard Asset Management, said: “The Fed telegraphed today that rate cuts are over for now, and markets seem to agree.”

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Consistent rate cuts of this nature are rare in times of economic growth, and the US is enjoying historically low unemployment, solid wage growth and suitable household purchases.

“The Fed chairman has been under pressure all year by Trump to continue juicing the economy by sharply cutting interest rates, which are already at historically low levels, as he seeks to bolster his chances of winning next year's election in 2020,” reports CNN Business. The news of a third successive cut will go down well with the president, but implications that Powell will now pause may put them on a collision course.

By cutting now the central bank is reducing its toolkit of measures should the economy slow, and there are signs that a potential slowdown may already be happening. Data released on Wednesday by the Commerce Department revealed that the US economy’s growth rate has continued to slow.

This has led some to conclude, despite investors’ analysis of Powell’s statement yesterday, that further rate cuts are likely. “On balance, we still anticipate that a further deterioration in the incoming activity data will persuade the Fed to change tack and cut interest rates one final time in December,” said Paul Ashworth, the chief US economist at Capital Economics.

Addressing concerns that continued rate cuts could bring inflation to unacceptable levels, Powell argued the threat was unlikely. “I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation,” he said.

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