The US Federal Reserve, Federal Open Market Committee (FOMC), has decided to cut benchmark rates by 50 basis points – the first cut in four years. The Fed said it is not on any pre-set course but felt its restrictive policies had the desired impact of pushing inflation lower as it works towards its target rate of 2%. One FOMC member preferred a 25-basis-point cut.
The Feds mandate holds a 2% rate of inflation and full employment. Currently, the PCE [Personal Consumption Expenditures] is at 2.5% and unemployment stands at 4.2%. The twelve-month CPI [Consumer Price Index] stands at 2.5%, having increased by 0.2% in August. The index for all items less food and energy rose 0.3 percent in August after rising 0.2 percent in July.
The PCE measures changes in the prices of goods and services purchased by consumers, whereas the CPI is an index for goods and services.
He said the medium expectations of Fed Fund rates are 4.4% by the end of this year but are not set in stone.
The FOMC stated:
“The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
And;
“The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.”
Fed Chair Jerome Powell once again reaffirmed that they will make decisions meeting by meeting as new data comes in. “The process evolves over time,” said Powell. He expressed his opinion that the economy was in a good place, and “they want to keep it there.”
Powell said the larger cut was a sign they did not want to “get behind.”
Many observers anticipated a 25 bps cut, fearing that a large decrease would indicate more troubling economic signs. Additionally, the larger rate cut arrives just before a Presidential election, and some observers have expressed concern that politics would play a role in a decision that could drive economic growth higher. Powell disavowed this belief, explaining they just do their job of doing what is best for Americans. “We are encouraged by the progress that we have made.”
Michael Weber, Associate Professor of Finance, Chicago Booth School of Business, expressed his opinion that the cut won’t impact ordinary consumers or firms much at all.
“A small deduction in APR on a credit card will go totally unnoticed by the majority of consumers. What is so important about the Fed’s decision today is what it means for the future. As despite the cut being immaterial, it does matter where interest rates stand at the end of the year, and today’s decision certainly plays a part in that journey. The outlook on where the Fed is ultimately heading with interest rates is what markets should be focused on, as this will tell us where the US and indeed the global economy is headed.”
