Interest rate cut by 25 basis points after FOMC meeting

The Federal Reserve lowered its quarter-point reference rate on Wednesday as an insurance policy, not against what's wrong with the current economy, but against what might go wrong in the future. This was the first rate cut by the central bank in more than ten years.

In the face of intense political pressure and the persisting expectations of President Donald Trump's market, the Federal Open Market Committee, made up of policy makers, has lowered its target range for its overnight rate from 2% to 2.25%. 25 basis points from the previous level.

In approving the reduction, the FOMC cited "the implications of global developments for the economic outlook as well as moderate inflationary pressures". The committee characterized the current state of growth as "moderate" and the job market as "strong," but nevertheless decided to soften its policy.

This rate is tied to most consumer debt and will likely have an immediate impact on reducing credit costs.

The Fed also left the door open for future cuts, saying it would "act appropriately to support expansion" as it continues to evaluate incoming data.

"They are looking at a whole range of topics: Really, the low inflation allows the Fed to take preventative measures and hopefully avoid going into the future at rates such as negative rates. "said Mark Haefele, global director of investment at UBS Wealth Management. "Since they only made 25 basis points, they avoided doing what some people thought would be more shocking and marveling at 50 basis points, so they can switch to a language like" data dependent ", now that they have shown themselves willing to be flexible. "

The reduction vote also came with the decision to halt, two months earlier than planned, the reduction of the central bank's obligations in its balance sheet.

"This action confirms the Committee's view that sustained growth in economic activity, the strength of the labor market and inflation close to the 2% symmetrical target set by the Committee are the the most likely results, but uncertainties remain as to these prospects, "the FOMC said in its statement.

The rate cut sparked two dissensions: Fed presidents Esther L. George of Kansas City and Eric Rosengren of Boston did not vote, as many observers had expected.

Trump was looking for a 50 basis point discount. It remains to be seen whether this easing will put an end to his persistent criticism of President Jerome Powell and his fellow policymakers.

The reduction of a quarter point was widely expected. The initial reaction of the financial markets has been moderate, with major stock market indices and bond yields having hardly changed.

This was the first reduction in the fund rate since December 16, 2008, as the US economy was in financial crisis threatening to crush the global economy. In this case, a sense of urgency at the depth of the slowdown pushed the FOMC to reduce the 1% rate to a range of 0% to 0.25%, where it remained for seven years.

Taking the initiative after this week's two-day meeting, policymakers noted that business investment was "moderate" although household spending "has recovered since the beginning of the year. ;year".

In parallel with the rate cuts, the committee decided to end the reduction of the bonds it holds on its balance sheet.

In another action to resuscitate the moribund economy of the crisis era, the Fed had instituted three rounds of purchases involving treasuries and mortgage backed securities. The program, known in the markets as quantitative easing, has overtaken the balance sheet by $ 4,500 billion at one point.

In October 2017, the committee began to reduce the size of the bond portfolio by allowing a capped product to decline each month while reinvesting the rest.

The end was scheduled for September, but the FOMC decided to leave two months earlier. All profits should now be reinvested starting Thursday.

In total, badets decreased by $ 618 billion, but remain at $ 3.6 trillion. This is well above the level expected by most Fed officials and market players at the end of the roll-off. Ending the program sooner than expected indicates that it did not turn out, as formerly thought former president Janet Yellen, "like watching the paint dry."

Instead, the nine rate hikes since December 2015 as well as the end of QE ended up being more disruptive than expected by Fed officials. Powell learned that when the markets burst, the difficult situation after declaring in December that the downsizing was on "autopilot".

Powell had been in trouble two months earlier when he said in October that the fund level was "far from neutral" or that it would only be considered stimulating or restrictive and would imply the end of rate increases.

Trump intensified his dispute with the Fed, sometimes calling central bankers "crazy" for the rate hike and hinting that Powell's work could be compromised. The president and his chief economic advisor, Larry Kudlow, have called for a half-point cut and immediate termination of what Trump calls a "quantitative tightening."

In the opinion of the White House, economic growth would be even stronger than the pace higher than the trend that it has maintained since Trump's election. GDP grew 2.1% in the second quarter and 3.1% in the first quarter, and the unemployment rate is 3.7%, which is close to the lowest level of the last 50 years. At the same time, the stock market has reached record levels.

But Trump insisted that without tightening the Fed, GDP growth would be north of 4% and the Dow Jones industrial average would be 10,000 points higher.