US Fed cuts rates further to 1.5-1.75% to support expansion
31 October 2019
The US Federal Reserve on Wednesday announced a further reduction in its policy interest rates, the third time this year, in a move to ensure the US economy continues on an expansionary path and does not slip into recession amidst an ongoing trade war with China.
The Federal Open Market Committee of (FOMC) the US Federal Reserve at its meeting on Wednesday, decided to lower the target range for the federal funds rate to 1.5 to 1.75 per cent. This, according to the committee's view, is in line with the policy of sustained expansion of economic activity, strong labour market conditions, and inflation near the 2 per cent limit.
FOMC said the move is consistent with its statutory mandate to foster maximum employment and price stability, but signalled its rate-cut cycle might take a pause.
While the target objectives are the most likely outcomes, the FOMC said uncertainties about this outlook remain and that the committee will continue to monitor the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
On the liquidity challenges in the money market in recent months, particularly in mid-September, Fed chairman Jerome Powell said the problem is not with the stock of liquidity rather than flow of it.
To address that, the Federal Reserve aims to maintain a reserve balance at or above the level that prevailed in early September 2019. For this, the Fed would purchase treasury securities time to time.
The FOMC said it will also assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective.
The committee noted that labour market remained strong since its September policy announcement and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, FOMC stated.
The Fed said business investment and exports remained "weak."
Unemployment is near a 50-year low, inflation is moderate, and data earlier on Wednesday showed gross domestic product grew at an annual rate of 1.9 per cent in the third quarter, a slowdown from the first half of the year but not as sharp a decline as many economists expected and some Fed officials feared.
But parts of the economy, particularly manufacturing, have stuttered in recent months as the global economy slowed. Businesses have pared investment in response to the US-China trade war that both raised tariffs on many goods, and also made the world a riskier place to make long-term commitments.
While that has not had an obvious impact yet on US hiring or consumer spending, Fed officials felt a round of "insurance" rate cuts was appropriate to guard against a worse outcome. The Fed cut rates in July and again in September, and by doing so hoped to encourage businesses and consumers with more affordable borrowing costs.