US Fed cuts policy rate by 25 bps to 2-2.25%
01 August 2019
The Federal Open Markets Committee (FOMC) of the US Federal Reserve at its meeting today decided to lower the target range for the federal funds rate by 0.25 percentage points to 2 to 2.25 per cent, a move aimed at supporting sustained expansion of economic activity.
FOMC noted that labor market conditions remained strong and inflation was near the committee's symmetric 2 per cent, uncertainties about this outlook remained. The committee said it would continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The committee said it would effect the planned reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.
FOMC said information received since its June meeting indicated that the labor market remained strong and that economic activity has been rising at a moderate rate. The economy has reported solid job gains in recent months, and the unemployment rate has remained low.
Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. Overall inflation and inflation for items other than food and energy are running below 2 per cent, it added.
While the rate cut was widely expected by markets, comments by Fed Chairman Jeremy Powell, after the Fed meeting dampened markets. The Fed chairman made it clear that the rate cut was “mid-cycle adjustment to policy”, ruling out a series of rate cuts, as demanded by President Donald Trump.
The Fed appears to have lowered rates this time due to the uncertainties to economic growth due to the ongoing trade tensions and lower than expected inflation. But as the FOMC statement said, US labour market remains strong and economic activity in the US has been rising at a moderate rate.
The Dow Jones Industrial Average and the S&P 500 lost over 1 per cent after the statement.
The dollar index that tracks the movement of the dollar against 6 major currencies spiked up very sharply after the Fed’s statement, and is very close to the 100 mark.
Rupee was trading slightly down, around 69. While a stronger dollar will apply downward pressure on the Indian currency, the relatively attractive yields on Indian bonds is likely to sustain FPI flows in to Indian debt markets, easing pressure on rupee.