The Strategist

US Fed cuts interest rates for the first time in 10 years

08/01/2019 - 10:53

On July 31, the US Federal Reserve System (Fed) reduced the key rate to 2–2.25% per annum. The decline in its level occurred for the first time since the end of the crisis of 2008. By this decision, the US Central Bank intends to support the US economy amid a slowdown in global growth and conflicts in world trade. However, the markets on Wednesday were more interested in the comments of the regulator on how far the monetary policy easing would extent. It followed from the subsequent comments of Fed Chairman Jerome Powell that it was unlikely to be large-scale.

As a result of the July meeting, the US Federal Reserve Open Market Committee changed the interest rate on federal credit funds for the first time this year, lowering it by 0.25 percentage points, to a range of 2–2.25%. Recall that from the end of 2008 to December 2015, the United States, as part of the fight against post-crisis recession, had a record low rate of 0-0.25% per annum. At the end of 2015, against the backdrop of accelerating growth in the American economy, the regulator began to gradually increase the cost of borrowed funds, and this cycle lasted three years. In 2018, the rate rose four times (by 1 percentage point, up to 2.25–2.5% in total).

However, it has not changed this year. The refusal to further increase was explained by aggravated trade wars, which resulted in a slowdown in the growth of the global economy and trade. At the previous June meeting, the watchdog announced his readiness to "act as necessary to support expansion of the economy", and refused to "be patient" in the issue of adjusting rates. After that, the market had almost no doubt about the rate cut at the July meeting.

At the same time, US President Donald Trump tried to put pressure on the Fed the day before, saying that a decrease of 0.25 percentage points would not be enough for the economy.
Nevertheless, the watchdog was cautious and did not disturb markets. Explaining the rate cut to 2–2.25%, the Fed referred to concerns about the global economy and weak inflation in the United States, which remained below the target level of 2% (now 1.5%). “The prospects for the development of the American economy remain favorable,” Fed Chairman Jerome Powell said at a press conference following the meeting. “Our solution is designed to prevent the risks of an economic downturn due to weak global economic growth and trade uncertainty."

Regarding its future actions, the Fed expressed caution, announcing its readiness for a further decline in the event of such a need. Despite the change in the rate vector, the caution of the signals sent to the markets hardly allows talking about a U-turn in the US monetary policy. “We will closely monitor the situation in trade, we will closely monitor inflation. Unfortunately, I can’t answer your question in more detail,” said Mr. Powell, answering the question whether the Fed intends to lower the rate in the future. At the same time, he added that so far the regulator considers the conducted reduction in the rate sufficient. Such signals reduce the likelihood of multiple rate cuts this year, despite the fact that most market participants have been waiting for three rounds of such a reduction.