The Strategist

We did it again: US Fed cuts interest rates for the third time

10/31/2019 - 06:48

At the October meeting, the US Federal Reserve System lowered the key rate by 0.25 p.p., to 1.5-1.75% per annum. This decline was the third this year after three years of rate hike. However, in its statement, the regulator seemed somewhat softened, giving a signal that a new rate cut in December was still in question. Experts point out that this can only happen if growth rates deteriorate in the fourth quarter.

For the third time this year, the US Federal Open Market Committee lowered the interest rate on federal credit funds by 0.25 percentage points, to 1.5-1.75% (eight out of ten committee members voted in favor). Recall that from the end of 2008 to December 2015, the United States, in the framework of the fight against post-crisis recession, had a record low rate of 0-0.25% per annum. Then, over the course of three years, the Fed has been raising the rate gradually, bringing it to the level of 2.25–2.5%. In July 2019, citing a slowdown in economic activity in the United States amid external risks and a slow growth in inflation, the regulator switched to lowering the cost of federal borrowing, reducing the rate by 0.25%. It did it again in September.

In its statement, the Fed noted the good condition of the labor market and only a “moderate” growth in economic activity, while pointing out weakening dynamics of investment and exports.

The regulator expects “further growth in business activity, improvement of the situation on the labor market and maintaining inflation at about 2% as the most likely scenario”, but points out the presence of “uncertainty”.

The Fed again linked the rate cut to “the impact of global events and low inflation.” Its head, Jerome Powell, noted that “the US economy, especially the household sector, is performing well, but weakening global growth and trade poses constant risks.” In assessing the need for further action, the regulator will build on the state of the economy, the statement said. However, the committee abandoned the usual wording that “it will act as the situation requires”, promising instead that the regulator “will evaluate the necessary trajectory of the rate change”.