Fed cuts rates and halts balance sheet reduction

The US Federal Reserve reduced its policy rate on July 31 for the first time since September 14, 2008, amid a global economic slowdown and muted inflation.

It also announced it will conclude its balance sheet normalisation programme in August, two months earlier than it previously indicated.

The central bank lowered its federal funds target range by 25 basis points to 2–2.25%.

The decision came with two hawkish dissents from the Kansas and Boston Fed presidents Esther George and Eric Rosengren, who voted to maintain the policy rate range.

Fed governor Jerome Powell referred to the move as “insurance” against downside risks to the outlook from trade tensions and global growth, speaking during the press conference that followed the decision.

“We are trying to address the downside risk and shortfall in inflation,” he added.

Powell said the downside risks are having a “significant effect” on incoming data on financial conditions and the real economy, and it was a “risk management” decision.

Core inflation had been 1.6% on average over the last 12 months and upward pressures remained muted, Powell added. He noted that continued below-target inflation could risk anchoring inflation expectations at a lower level.

We are trying to address the downside risk and shortfall in inflation

Jerome Powell, US Federal Reserve

Headline inflation remained at 1.4% in June, after the figure for May was revised down, well below the Fed’s 2% target. Core inflation was 1.6%, up from 1.5% in May.

GDP increased at an annual rate of 2.1% in the second quarter of this year, down from 3.1% in the first quarter. The Federal Open Market Committee projected that growth would be 2.1% for 2019 when the last forecasts were published, in June.

The employment market rebounded recently to produce a further 244,000 jobs in June, up from the marked slowdown in May of 75,000 new positions. Unemployment stayed steady at 3.7%.

On the announcement, the dollar depreciated against the euro by 0.35% from its price an hour before the statement was released. It edged marginally lower in the moments after Powell’s prepared remarks.

The dollar had depreciated against the euro in the run-up to the decision, falling by roughly 0.3% between about 1pm and 5:30pm London time, two hours before the rate decision. Investors appeared somewhat disappointed with the decision.

The S&P 500 fell by almost half a percentage point during the press conference. The Dow Jones reacted slightly more, trading down 1.2% after the press conference finished.

This article first appeared on sister website Central Banking.