Fed cuts interest rate amid global challenges, low inflation

Last updated on August 1st, 2019 at 01:38 pm

Citing global economic weakness, trade uncertainty and low inflation, the Federal Reserve cut interest rates by 25 basis points on Wednesday.

The Federal Open Markets Committee voted to lower its target for the federal funds rate to 2 to 2-1/4%, although two members voted to maintain the current target.

“We believe this is the right move for today,” Federal Reserve chairman Jerome Powell said.

A cut in interest rates was widely expected with some observers suggesting the Fed might go further and cut rates by 50 basis points.

Mike Knetter, an economist and president of the University of Wisconsin Foundation, said ahead of the decision that no cut would have been too big of a surprise for markets while a larger cut would be too much given the strength of existing economic data.

“While the (Trump) administration may wish for a larger cut, if they were that concerned about the strength of recovery they would do more to resolve the trade disputes that are also contributing to uncertainty and softening demand,” Knetter said.

Avik Chakrabarti, an associate professor of economics at UW-Milwaukee, said ahead of the announcement that taking no action could have been justified by the low unemployment level.

But with inflation running below the Fed’s target of 2%, Annex Wealth Management chief investment officer Derek Felske said the interest rate cut was justified by the existing data.

“The economy is not hot and that is what you would fear,” he said of the potential for too much inflation.

Felkse said the rate cut would help mitigate against potential damage from a continued slowdown in global economies and uncertainty from rising trade tensions.

“The economy is in a decent spot,” he said, noting a rate cut would reduce the likelihood of a recession.

Felske spoke with BizTimes ahead of the Fed’s announcement and indicated he would be looking for Powell to emphasize the central bank’s independence during his press conference following the decision on rates.

“We can’t have a Federal Reserve that’s driven by short-run politics,” Felske said.

Bill Adams, a senior economist at PNC Financial Services, said he doesn’t believe the fed is caving to political pressure, despite President Donald Trump’s complaints that The Fed increased rates too quickly.

During his press conference, Powell said the committee took its actions to ensure against downside risk of global weakness, trade uncertainty and low inflation. He also said the committee never takes political considerations into account in making its decisions.

“We also don’t conduct monetary policy to prove our independence,” he said.

Powell said he would not blame trade uncertainty for global challenges, but also acknowledged that monitoring trade tensions is a new activity for the committee.

“There isn’t a lot of experience in responding to global trade tensions,” Powell said. “I would love to be more precise, but with trade it is a factor we have to assess in a new way.”

The Fed chairman also described the action as a “mid-cycle” adjustment and said it was not the start of a long series of interest rates typically seen in a recession.

“We think it’s probably two and done for this rate cutting cycle,” Adams said.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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