Economic Collapse

Economic Collapse: Fed cuts rates, facing global risks and pressure from Trump

Economic Collapse: Fed cuts rates, facing global risks and pressure from Trump

by Joseph Lawler.  September 18, 2019 Washington Examiner.

The Federal Reserve lowered its interest rate target by a quarter percentage point Wednesday, its second consecutive rate cut, in an effort to keep the economic expansion running despite signs of weakening global growth and domestic fears about President Trump’s trade war.

The Fed will now target short-term interest rates in a range between 1.75% and 2%, where they were from June to September of last year. Fed officials appeared to be split about the possibility of further rate cuts. Eight Fed officials, who were not named and are not necessarily on the monetary policy committee, projected that the central bank would again lower rates this year or next.

Three officials dissented from Wednesday’s decision. One, Federal Reserve Bank of St. Louis President James Bullard, preferred a larger rate cut. Two others disagreed with the move to lower rates.

“We took this step to help keep the U.S. economy strong in the face of some notable developments and to provide insurance against ongoing risks,” Chairman Jerome Powell said at a press conference following the announcement. Powell had previously suggested that the Fed’s previous rate cut, in July, was a one-off adjustment, rather than the start of a bigger effort to adjust monetary policy. One Wednesday, he reasserted that he thought only “modest adjustments” were necessary to keep the economy on track and the Fed expects growth to continue.

Nevertheless, Wednesday’s decision is a sign that the central bank, after years of raising rates to “normalize” monetary policy following years of emergency measures meant to counteract the financial crisis, is now working to reverse parts of that plan, as economic events did not unfold as expected.

Most importantly, Powell and other Fed officials expected inflation to rise above the Fed’s 2% target as unemployment fell below 4%, necessitating higher rates to keep prices in check. But inflation has remained low and has fallen over the course of this year to 1.4% in the measure preferred by the Fed.

At the same time, manufacturing has faltered, and some investors have expressed fears that the tariffs that have been imposed by both sides in the U.S.-China trade dispute could crimp growth, leading to heightened worries about the possibility of a recession. Wednesday’s policy statement from the Fed explained that business investment and exports have weakened, although it also noted that consumer spending has been strong.

Meanwhile, Trump, who has pressured the Fed to lower rates faster, to zero, complained about the decision.

Trump has broken the norm, set by recent past presidents, that White House officials don’t comment on the Fed’s monetary policy deliberations. He’s frequently and harshly criticized Powell, who’s maintained that he doesn’t allow politics to factor into his decision-making.

By pursuing unnecessarily tight monetary policy, Trump has argued, the Fed has undercut his ability to negotiate trade deals, especially with China, by weakening the domestic economy.

The interest rate target is one way that the Fed controls the money supply. It also moves dollars in and out of the economy by selling or buying government bonds, namely Treasury and government-backed mortgage securities. In the wake of the financial crisis, it lowered rates all the way to zero and then undertook massive purchases of government bonds, a policy known as “quantitative easing,” expanding its balance sheet to about $4.5 trillion. Since early 2018, it’s been reversing that process, shrinking the balance sheet to about $3.8 trillion and thereby lessening the money supply.

The Fed has said it will stop shrinking the balance sheet in September. Trump has called on it to resume buying securities as it did earlier in the economic recovery.

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