For the second time in a row the U.S. Federal Reserve has cut its benchmark interest rate, this time by 25 basis points to a range between 1.75% and 2%.
The Fed already cut rates by 25 basis points at the end of the last Federal Open Markets Committee (FOMC) meeting in July. That was the first rate cut by the FOMC in nearly 10 years. In a statement released afterwards, the Bank indicates weaker business sentiment and slower exports are the reasons for the rate cut, despite other economic indicators looking good.
The Fed said, “Although household spending has been rising at a strong pace, business fixed investment and exports have weakened.”
The Fed also pointed to lower than 2% inflation as another deciding factor in the rate cut.
“On a 12-month basis, overall inflation and inflation for items other than food and energy are running below two per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.”
The rate cut comes at a time when, by the Fed’s own admission, job gains have been solid, unemployment has remained low and household spending has been rising.
The committee was divided on this decision. Seven, including the Federal Reserve chairman Jerome H. Powell, voted in favour of a cut, while one vote was to lower the rate even further, and two preferred the target stay where it was. It’s no secret U.S. President Donald Trump has been putting pressure on the Fed to cut the benchmark rate. It is unusual for a sitting president to intervene in the process of the central bank and there is no clear indication if Trump’s comment have had any impact on the Fed’s last two decisions to cut rates. Despite the cut, the President still did not seem happy. Tweeting this today.
Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
The U.S. Fed is indicating it will most likely keep rates steady for the remainder of 2019, but forecasters are not taking another rate cut off the table.
How do Canadians see the cuts?
In a note sent to journalists and researchers, Senior Economist at RBC Josh Nye says, “The key question is how much further that adjustment, framed as insurance against risks from trade tensions and slowing global growth, will go.”
He says that there is, “significant divergence among committee members with seven expecting one more cut this year, five looking for no change, and five thinking a rate hike would be appropriate by year end.”
The policy statement, as RBC economist Nye also noted, was little changed from July. That could be because there was a lack of consensus among the board members.
The Fed, as Nye notes, will “act as appropriate to sustain the expansion.”
Nye is forecasting one more rate cut this year, bringing the total rate cut for 2019 to 75 basis points. Much of this depends on the outcome of global conditions, mainly trade tensions between China and the U.S. and the final decision of Brexit.
That sentiment was echoed by BMO Deputy Chief Economist Michael Gregory. In his note he says he believes, “the reasons why the Fed cut rates today were comparable to the reasons why it cut rates in July. If the economy continues to weaken (which we judge it will) and if trade policy continues to stoke uncertainty (which we also judge it will), another rate cut this year is probable.”
The Fed meets next on October 29 and 30th.
Why should you care?
Two rate cuts in a row could put pressure on the Bank of Canada to do the same.
Traditionally Canada’s central bank has followed the U.S.’s lead in rate cutting or raising. But that trend has changed since the beginning of the financial crisis 10 years ago, when the U.S. cut rates much more aggressively than Canada did.
This move by the Fed could make a similar cut from the Bank of Canada in the next rate announcement more likely, which would further lower Canadian interest rates.
