Federal Reserve Cuts Interest Rates for Third Time in 2019

on Oct31
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WASHINGTON — The Federal Reserve cut interest rates on Wednesday for the third time this year, reversing nearly all of 2018’s rate increases as uncertainty from President Trump’s trade war and slowing global growth continue to pose risks to the United States economy.

The decision to cut rates by another quarter point despite rock-bottom unemployment and decent overall growth shows the extent to which Mr. Trump’s hot-and-cold trade war, paired with a tenuous global outlook, has put the Fed on the defensive. While the central bank was on a steady march to raise rates just a year ago, it has spent the past several months trying to insulate the American economy against those threats and keep a record expansion humming.

On Wednesday, officials signaled that they would pause to assess incoming data before they considered lowering borrowing costs again, in part because of a potential easing of trade tensions.

The Fed chair, Jerome H. Powell, said that while “there’s plenty of risk left,” there are signs that some challenges are subsiding, including the possibility of a limited trade deal between the United States and China and a negotiated exit for Britain from the European Union.

This week’s decision to lower rates was intended to “provide some insurance against ongoing risks,” Mr. Powell said, adding that the United States economy remains strong. “Over all, we see the economy as having been resilient to the winds that have been blowing this year,” he said.

The Fed announcement came on a day when new government figures showed that American economic growth had inched lower in the last several months. Gross domestic product grew at a 1.9 percent annual rate for the third quarter, according to preliminary data released by the Commerce Department. Business investment fell 3 percent, with spending on factories and offices dropping more than 15 percent.

The decision to lower rates to a range of 1.5 to 1.75 percent was not unanimous. Two policymakers who voted against this year’s previous cuts dissented once again.

Fed officials had previously cut rates in July and September, likening those moves to taking out insurance. Although the economy is holding up — growth remains near potential and consumers are spending — they wanted to inoculate the economy against the harmful effects of uncertainty and slowing global demand, which have included diminished business investment and manufacturing weakness.

But officials signaled that the Fed was shifting to a more patient mode. It dropped a key line from its post-meeting statement in which it pledged to “act as appropriate to sustain the expansion,” language it had been using to signal a willingness to lower interest rates. Mr. Powell backed that up during his subsequent news conference, making it clear that the Fed would need to see economic deterioration before cutting interest rates again.

“We see the current stance of policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook,” Mr. Powell said. “If developments emerge that cause a material reassessment of our outlook, we would respond accordingly.”

The Fed has now reduced its policy rate by a cumulative 0.75 percentage point this year, just as it did during two mid-business-cycle interest rate adjustments in the 1990s. While those insurance cut cycles were eventually reversed — the Fed returned to interest rate increases — Mr. Powell indicated that increases were not on the table unless inflation showed signs of moving higher. Price gains have been falling short of the Fed’s 2 percent target for years, making that unlikely.

Inflation “seems to be settling in below 2 percent, so we really don’t see that risk,” Mr. Powell said. “We’re not thinking about raising rates right now.”

Much-lower interest rates could bolster stock prices and give the economy a lift headed into the 2020 election, which would be good news for Mr. Trump. Absent any help, most economists expect that growth will gradually decline to just below 2 percent, as the short-term benefits of Mr. Trump’s 2017 tax cuts and higher government spending fade.

That could be problematic for the president, who promised to coax growth to 3 percent or more, well above the level economists see as sustainable given current demographic and productivity trends.

The Fed has insisted that it is independent of the White House and will set policy with an eye on the economy, not the political cycle. Congress has given the Fed two goals, maintaining maximum employment and stable inflation, but freedom in how it achieves them. It does so primarily by changing borrowing costs to stoke or slow borrowing and spending.

But it is currently making policy calls against a complicated economic backdrop.

The Fed has failed to sustainably hit its 2 percent inflation target since formally adopting it in 2012, and various measures of consumer and market inflation expectations have recently drifted lower. That creates a risk that price increases will become mired permanently below the central bank’s goal, leaving it with less room to cut interest rates — which include inflation — in a downturn.

Overall economic growth is also slowing from a stronger pace in 2018 and early 2019, though it remains close to the Fed’s estimate of its longer-run potential. That is consistent with what the policymakers expected: They have long believed that the economy would slow down once the effects of Mr. Trump’s tax cuts and higher government spending had played out.

But stock prices are soaring, and the housing market has stabilized as mortgage rates have fallen. While it is not obvious how or even whether the trade war will end, Mr. Trump has said that negotiators are making progress toward a first-phase deal with China.

Mr. Powell avoided tying the outlook for monetary policy too closely to the success or failure of those negotiations.

“That’s one factor among many, many factors that factor into our assessment of the outlook,” Mr. Powell said of the potential for trade resolution.

Interest rate changes do not filter through the economy immediately, so officials want to see how their recent stimulus plays out in economic data. Some officials are also wary of stoking asset price bubbles and unhealthy risk-taking by lowering interest rates too much and too early.

Both Esther George, the president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, the president of the Federal Reserve Bank of Boston, voted against Wednesday’s rate cut. They have both previously dissented, saying that they would prefer to see a more pronounced deterioration in economic data before lowering rates.

James Bullard, the president of the Federal Reserve Bank of St. Louis, had dissented in favor of a larger rate cut in September, but voted in favor of October’s quarter-point adjustment.

The Fed next meets Dec. 10-11. Between now and then, investors will focus on what constitutes a “material” weakening, one that is sufficient to drive the Fed to lower rates again.

“Retaining some constructive ambiguity and optionality at this stage is likely prudent,” Michael Gapen, an economist at Barclays, wrote in a note after Wednesday’s meeting.

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