Fed Cuts Key Interest Rate for First Time Since 2008, Citing Trade Uncertainty and Weak Global Economic Growth

The Federal Reserve lowered its benchmark interest rate for the first time in over 10 years on Wednesday, with Chairman Jerome Powell citing uncertainty created by President Donald Trump's trade policies and low inflation as some reasons behind the decision. The Federal Open Market Committee announced it would lower its target rate by 25 basis points to between 2 and 2.25 percent.

The announcement to lower the target for the federal funds rate, which impacts how much banks charge each other for overnight money lending, will influence consumers. The key Fed rate affects how much consumers pay when borrowing money to purchase a house. Most credit cards also move in accordance with the federal funds rate. And home equity lines of credit and bank savings rates are also pegged to the Fed rate, rising and falling in line with changes.

"Through the course of the year, weak global growth, trade policy uncertainty and muted inflation have prompted the [Federal Open Market Committee] to adjust its assessment of the appropriate path of interest rates. The committee moved from expecting rate increases this year, to a patient stance about any changes, and then to today's action," Powell said at a press conference held after the central bank announced the rate decrease.

Although the FOMC statement did not say whether future cuts would be expected, Powell left the possibility open.

"As the committee contemplates the future path of the target range of 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 percent objective," he said.

The rate decrease, which is intended to extend the economic recovery, comes despite relatively generally strong job growth in recent months. Some 224,000 jobs were created last month. Unemployment is at 3.7 percent, after rising slightly from a previous 50-year low.

But the economy has also shown less positive signs. Guided by low business investment, the GDP increased just 2.1 percent in the second quarter of the year, a full percent drop from the first rate of increase during the first three months of 2019. Additionally, inflation has not reached the Fed's targeted 2 percent rate.

The decision to announce a rate decrease aligned with the predictions from major banks. After last month's meeting, in which Powell indicated he would not yet ease rates, major banks began predicting that the central bank would decrease the rate this year.

The rate decrease was just the fifth time in 25 years that the Fed has cut rates, according to The Wall Street Journal, and the central bank last did so in 2007 in attempt to preempt slowing growth.

But in 2007, when the Fed cut rates, the key funds rate was over 5 percent. When the Fed lowered rates in 2001, the benchmark rate was 6.5 percent. With the rate resting below 2.5 before the FOMC announcement, if an economic downturn develops, the Fed will have less ability to cut rates.

"When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress," New York Fed President John Williams noted earlier this month during a speech.

Trump has long called for a rate cut, blaming the central bank for economic growth being lower than he would like. But economists have said that the president's claims that he would be achieving 5 or 6 percent economic growth are unrealistic, even if he disagrees with the Fed policy.

Jerome Powell
Federal Reserve Chairman Jerome Powell speaks during a press conference after a Federal Open Market Committee meeting in Washington, DC on July 31. ANDREW CABALLERO-REYNOLDS/AFP/Getty Images
Fed Cuts Key Interest Rate for First Time Since 2008, Citing Trade Uncertainty and Weak Global Economic Growth | News