The Federal Reserve reduced US interest rates for the first time in over a decade on Wednesday, citing concerns about US inflation and the global economy, but indicated it would not rush to ease further, a move which boosted the dollar and gave a big knock to US stocks.
The US central bank pointed out that it will “continue to monitor” data that will affect the economy, saying it “will act as appropriate to sustain” a record-long US economic expansion.
The 25 basis point cut in borrowing costs to 2.00% move was widely expected, although there were two dissenting voices at the Federal Reserve Open Market Committee (FOMC) meeting, with Boston Fed President Eric Rosengren and Kansas City Fed President Esther George arguing for leaving rates unchanged.
In its statement, the Fed noted that business spending was “soft” and that measures of inflation compensation remain low, but said that it continued to regard the labor market as “strong” and added that household spending had “picked up.”
The Fed said the rate cut should help return inflation to its 2% target while uncertainties about the outlook remain although, it added, a sustained expansion of economic activity and a strong labor market are also the most likely outcomes.
Speaking in a press conference after the statement was released, Fed boss Jerome Powell characterized the rate cut as “a mid-cycle adjustment to policy,” with the comment interpreted as not implying any sharp further cuts are on the way.
In a note to clients reacting to the Fed move, economists at ING markets said: “We characterise today’s move as a precautionary, pre-emptive policy change to ensure that the US economic expansion – already the longest since the National Bureau for Economic Research’s database began in 1854 – continues for a good while longer. However, the Fed never cuts rates just once and we doubt it will this cycle.”
They added: “The language in the Fed statement is fairly vague and offers room for flexibility over coming months. It keeps in play what futures markets are pricing - at least another three rate cuts before the end of 2020. But, if anything, the statement (and vote outcome) offers more support to our more cautious outlook of only one further rate cut, most likely coming in September.”
US stock plunged after the Fed news, having largely drifted sideways earlier on Wednesday as investors awaited the meeting's outcome. The Dow Jones Industrials Average closed down 333.75 points, or 1.2%, at 26,864.27, although that was above the session low of 26,719.60.