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Federal Reserve cuts rate by 0.25%, defying Trump’s demand for “Big Interest Rate Drop”

Central bankers keep their powder dry-ish amid "global developments"

The Federal Reserve cut its benchmark rate by a quarter of a percentage point in a bid to keep trade wars and the threat of a global recession – what it delicately called “global developments” – from tanking America’s decade-long expansion.

President Donald Trump reacted to the cut by tweeting: “Jay Powell and the Federal Reserve Fail Again. No 'guts,’ no sense, no vision!” On Monday, Trump had pressed on Twitter for a bigger cut, saying: “Jay Powell & the Fed don’t have a clue” and “Big Interest Rate Drop, Stimulus!”

It was the Fed’s second quarter-point cut in two months as the central banker tried to provide some help to the economy while keeping a buffer they could use if needed to counteract more severe financial trouble. 

“This is a time of difficult judgments,” Powell said in a news conference. “The main takeaway is: This is a committee that has shifted its policy stance repeatedly, consistently, through the course of the year to support economic activity as it has felt is appropriate. You’ve seen us being willing to move based on data, based on the evolving risk picture. I have no reason to think that will change, but it will continue to be data-dependent. That’s where I am, and that’s where the bulk of the committee is.”

The committee issued a statement maintaining its assessment of the economy as expanding at a “moderate” pace after downgrading from the “solid” pace cited at their June gathering. The statement continued to characterize the U.S. labor market as “strong” with “solid” job gains.

“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower the target range for the federal funds rate,” the statement said.

The Fed’s benchmark rate is now set in a range of 1.75% to 2%. Martin Eiden, a real estate broker with Compass in New York, said the Fed was in a “no win” situation. While the rate cut was small, some would argue it reduces the buffer the committee has as a tool to react to a severe economic downturn.  In the past, U.S. presidents have refrained from public criticism of the Fed to avoid undermining the central bank’s ability to set monetary policy, especially if needed during a financial crisis. An independent central bank is one of the hallmarks of a developed nation.

“It makes no sense to lower rates,” Eiden said. “They’re using 'dry powder’ now that won't be available when a real crisis arises. However, if they do not, they will come across as doing nothing. With the self-inflicted crises caused by the executive branch of government, the least objectionable decision is to cut rates.”

U.S. economic growth probably will slow to 1.3% by 2020’s final quarter from 1.9% in the current period, Fannie Mae said in a forecast on Tuesday. That would be the weakest economy since 2013, according to data from the Bureau of Economic Analysis

The FOMC probably will cut rates at least one more time this year, likely at its December meeting, according to Fannie Mae Chief Economist Doug Duncan, who correctly projected the size of today's cut.

“Faltering business investment and worrying downside risks, including the ongoing trade tensions between the U.S. and China, could become a heavier weight on growth,” Duncan said. “It appears the Fed is prepared to help insure against downside risks by easing further.”

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