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Fed cuts interest rates, cites weakening exports and low inflation

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Via Fox Business

Outlook for the Fed

Vantagepoint Investment Advisers CIO Wayne Wicker discusses how the markets will react to a Fed rate cut.

The Federal Reserve on Wednesday cut its benchmark interest rate by 25 basis points, citing weakening exports and low inflation.

The reduction, which lowered the federal funds rate to a range of 1.75 percent to 2 percent, was the central bank’s second in as many meetings. In July, the Fed lowered rates for the first time in more than a decade after hiking them nine times since December 2015.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” the central bank’s monetary policy committee said in a statement. “Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.”

Seven of 10 members voted in favor of lowering rates, with three dissenting. St. Louis Fed President James Bullard preferred a 50-basis point cut, while Kansas City Fed President Esther George and Boston Fed President Eric Rosengren preferred no action.

The dot plot that accompanied the decision showed the FOMC’s next move is expected to be a rate hike. Meanwhile, the summary of economic projections upgraded the 2019 forecast for GDP growth by 10 basis points to 2.2 percent, while predicting unemployment would be worse, at 3.7 percent, than previously expected.

Slowing growth and the recently inverted yield curve — a signal from bond markets that investors are more worried about the current economy than future conditions, which are typically more difficult to predict — have spooked investors and sparked recession fears on both Wall Street and Main Street.

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“The Fed sees this as an insurance-type cut,” New York-based Bank of America Merrill Lynch Chief U.S. Economist Michelle Meyer told FOX Business on Tuesday. “They are cutting proactively in order to ensure that the recovery continues.”

Wednesday’s rate cut was the second of what Chairman Jerome Powell previously called a “mid-cycle adjustment,” and not the beginning of a series of deeper rate cuts.

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“In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course,” minutes from the July meeting said.

While Wednesday’s decision was widely expected, traders were thrown for a loop on Tuesday when futures data from CME Group showed a less than 50 percent chance of a 25 basis-point cut as the New York Fed was forced to intervene in money markets to keep rates from spiking above its target. Two hours ahead of the decision, the CME data showed a 75 percent chance of a cut.

Attention now shifts to Powell’s press conference, which will begin at 2:30 p.m. ET.

This story is developing. Check back for updates.


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