U.S. central bank cuts interest rate again but split on what to do next - Action News
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U.S. central bank cuts interest rate again but split on what to do next

After spending a decade on the sidelines, the U.S. central bank has cut its benchmark interest rate for a second time this summer, in a bid to stimulate the U.S. economy.

Federal Reserve moving to stimulate economy as trade fears mount

U.S. Federal Reserve chair Jerome Powell has been criticized by the U.S. president for not cutting interest rates sooner. (Andrew Harrer/Bloomberg)

A sharply divided Federal Reserve cut its benchmark interest rate Wednesday for a second time this year, but indicated it may not cut rates any further this year.

The Fed's move will reduce its benchmark rate which influences many consumer and business loans by an additional quarter point to a range of 1.75 per centto 2 per cent.

The action was approved 7-3, with two officials preferring to keep rates unchanged and one arguing for a bigger half-point cut. It was the most Fed dissents in three years.

The divisions on the policy committee underscored the challenges confronting chairman Jerome Powell in guiding the Fed at time of high uncertainty in the U.S. economy.

Stock reaction

Stock prices tumbled after the Fed issued its statement, reflecting disappointmentit had declined to indicate that more rate cuts are likely this year. The Dow Jones Industrial Average was down 150 points an hour later.

The economic expansion appears durable in its 11th year of growth, with a still-solid job market and steady consumer spending. But the Fed is trying to combat threats including uncertainties caused by President Donald Trump's trade war with China, slower global growth and a slump in American manufacturing. The Fed notes in a policy statement that "business fixed investment and exports have weakened."

The Fed's modest rate cut irritated Trump, who has attacked the central bank and insisted it slash rates more aggressively. The president immediately signalled his discontent on Twitter

Updated economic and interest rate forecasts issued Wednesday by the Fed show that only seven of 17 officials foresee at least one additional rate cut this year. And at least two Fed officials expect a rate hike next year.

None of the policymakers foresee rates falling below 1.5 per centin 2020 a sign the turbulence from a global slowdown and Trump's escalation of the trade war is viewed as manageable.

The median forecasts show the economy is expected to grow a modest 2.2 per centthis year, 2 per centnext year and 1.9 per centin 2021. Those forecasts are well below the Trump administration's projection that the president's policies will accelerate growth to 3 per centannually or better. But they also suggest policymakers do not envision a recession.

Unemployment is projected to be 3.7 per centand inflation 1.5 per cent, below the Fed's target level of 2 per cent.

A resumption of trade talks between the Trump administration and Beijing and a less antagonistic tone between the two sides have supported the view that additional rate cuts might not be necessary. So has a belief that oil prices will remain elevated, that inflation might finally be reaching the Fed's target level and that there are increasing signs that the U.S. economy remains sturdy.

The job market looks solid, wages are rising, consumers are still spending, and even sluggish sectors such as manufacturing and construction have shown signs of rebounding.

Yet no one, perhaps not even the Fed, is sure of how interest rate policy will unfold in coming months. Too many uncertainties exist, notably the outcome of Trump's trade war.

Trump wants even lower rates

Trump has in the meantime kept up a stream of public attacks on the central bank's policymaking, including referring to Powell as an "enemy" and the Fed's policymakers as "boneheads." Even though the economy looks resilient, the president has insistedthe Fed slash its benchmark rate more deeply even to below zero, as the European Central Bank has done part to weaken the U.S. dollar and make American exports more competitive.

Powell has said policymakers remain focused on sustaining the expansion and keeping prices stable without regard to any outside pressures.

The Fed is monitoring the global slowdown, especially in Europe, and the U.K.'s effort to leave the European Union. A disruptive Brexit could destabilize not just Europe but the U.S. economy, too.

U.S. inflation, which has long been dormant, has begun to show signs it is reaching the Fed's twoper cent target and might remain there. If the Fed's policymakers conclude that inflation will sustain a faster pace, it might give them pause about cutting rates much further.

The most serious threat to the expansion is widely seen as Trump's trade war. The increased import taxes he has imposed on goods from China and Europe and the counter-tariffs other nations have applied to U.S. exports have hurt many American companies and paralyzed their plans for investment and expansion.

In recent days, the Trump administration and Beijing have acted to de-escalate tensions before a new round of trade talks planned for October in Washington. Yet most analysts foresee no significant agreement emerging this fall in the conflict, which is fundamentally over Beijing's aggressive drive to supplant America's technological dominance.