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The Federal Reserve cut the federal funds rate by 25 basis points in July of 2019. After yesterday’s meeting, the Federal Open Markets Committee has dropped interest rates by another 25 points. Why?
The Federal Open Market Committee (FOMC) met once again on September 17th and 18th of this year, and the results of this meeting were eagerly anticipated by economists and analysts across the world. Announcing a second rate cut to the Federal Reserve, the FOMC lowered interest rates by 25 basis points for the second time this year to a range of 1.75% to 2.00%. This follows the first reduction of 25 basis points in July of 2019. This is the second rate cut we’ve seen from the Federal Reserve this year, and these reductions mark the first substantial cuts that have occurred to the federal funds rate since the Great Recession back in 2008. Citing multiple concerns, the Fed pointed to a drop in business investment from July until now, and also underlined the President’s trade war with China (and the uncertainty surrounding it that is currently affecting the global market) as further reasoning for these cuts. Many factors can affect both the U.S. economy as well as the global economy; the market is almost always rife with speculation, and things like the United States declaring China a currency manipulator, a spike in tariffs both domestically and in China, and a flaring of geopolitical tensions on the Arabian Peninsula can have a substantial effect on projections for the overall health of the world market.
The U.S. and China will continue trade negotiations through September of this year, but as neither side appears to be backing down in this trade war, the markets are reacting wildly. Similarly, tensions in the Middle East – particularly between Saudi Arabia and Iran – are causing uncertainty regarding the price of oil, which also leads to the market fluctuating. But, don’t worry – despite what may appear to be a “doom and gloom” scenario, at least globally – the FOMC’s economic projections relating to the U.S. economy indicate a potential increase in U.S. GDP growth and now forecast the GDP to grow by 2.2% (an uptick from the median projection of 2.1% in the last dot plot release in June. Additionally, when it comes to inflation the Fed statement projects 1.8% of inflation in core personal consumption expenditures; the stated inflation target is 2%. This is good, in that this target helps the U.S. economy to avoid deflation. Regarding the FOMC’s statement on Wednesday: Jerome Powell, the Fed Chair, stated that the U.S. economy has remained strong since their last meeting – and unemployment has stayed low – but, “there are risks to this positive outlook.” While Powell ruled out the possibility of negative rates (which President Trump has called for over the last week, pointing to several European central banks who have negative rates as examples), Powell stated, “Generally Fed participants think [this can] be achieved with modest adjustments to the federal funds rate. If the economy does turn down, then a more extensive series of rate cuts could be appropriate. We don’t see that. We don’t expect that.” Policymakers within the FOMC are split. Some support these changes, others do not, and many are urging caution, given the uncertainty in the global market thanks to recent events. The Fed is set to meet twice more in 2019; seven of the 17 policymakers involved have stated that they could see the possibility of at least one more rate cut, while five would prefer to halt any additional easing until the first quarter of 2020.
The next scheduled announcement from the Fed will be on October 30th of 2019, followed by the last meeting for the year on December 11th.