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Fed Cuts Interest Rates To Prop Up The Slowing Economy

Sep 18, 2019
Originally published on September 18, 2019 5:22 pm

Updated at 5:15 p.m. ET

The Federal Reserve cut interest rates Wednesday for the second time in seven weeks, in an effort to prolong the decade-old economic expansion in the face of rising headwinds.

The Fed lowered its target for the federal funds rate by a quarter percentage point, to a range of 1.75% to 2%. President Trump, who has been calling for deeper rate cuts, criticized the move as another "fail" by the Fed. Major stock indexes fell after the central bank's announcement but later recovered.

The rate cut, which had been widely expected by analysts, will trim the cost of borrowing for households and businesses.

"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," Fed Chairman Jerome Powell said in a news conference.

Chief among those risks are slowing growth in other countries as well as the ongoing trade war, both of which have reduced exports and caused American business owners to think twice about spending money.

"Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their business," Powell said.

The architect of that unnerving trade policy is the president, who has been quick to blame the Fed for the economic slowdown.

"Jay Powell and the Federal Reserve Fail Again," Trump tweeted after the Fed's statement. "No 'guts,' no sense, no vision! A terrible communicator!"

The stock market took a kinder view. While stocks fell when the rate cut was first announced, they rebounded during the Fed chairman's news conference. The Dow Jones Industrial Average and the S&P 500 both ended the day in positive territory.

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Powell said he believes the economic slowdown can be navigated with modest adjustments in interest rates, but he offered reassurance that the central bank is ready to do more if necessary.

"If in fact the economy weakens more, then we're prepared to be aggressive," he said.

The market fell sharply in July, when the Fed cut interest rates for the first time in more than a decade, in part because Powell seemed to suggest that might be the last rate cut for a while.

Since then, economic indicators have worsened, with the U.S. imposing new tariffs on more than $100 billion in Chinese imports this month and a tariff increase scheduled for mid-October.

Two members of the Fed's rate setting committee dissented from Wednesday's cut, preferring to leave rates unchanged. One member voted for a more aggressive cut of a half percentage point. Powell said he welcomed the range of views from his colleagues.

"Sometimes the path ahead is clear and sometimes less so," he said. "We're going to be looking carefully, meeting by meeting, as we go. And as I said, we will act as appropriate to sustain the expansion."

Many forecasters are anticipating additional rate cuts this year. But even with that extra push from the Fed, economic growth is expected to slow, possibly dipping below 2%.

The trade war and slowing growth overseas are not the only economic speed bumps. The effects of the 2017 tax cut are dwindling. And there's growing uncertainty about oil prices after the attack over the weekend in Saudi Arabia.

Nervous that a slowing economy could jeopardize his reelection chances, Trump has been browbeating the Fed to cut interest rates aggressively, to zero or even lower. Powell brushed off the president's criticism.

"I continue to believe that the independence of the Federal Reserve from direct political control has served the public well over time," Powell said. "I assure you that my colleagues and I will continue to conduct monetary policy without regard to political considerations."

It's not clear that lower interest rates will do much to help the nation's struggling factories.

"We see the driving force of the slowdown certainly in manufacturing as trade uncertainty," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. "Cutting the fed funds rate is not going to be able to fully alleviate that uncertainty."

Factories and other businesses have cut back on investment — not because it's too expensive to borrow money, but because they're not sure they can sell their products. In that environment, Luzzetti said, cutting interest rates can do only so much.

"I think it will help prop up confidence. It will help financial conditions. But it's going to be difficult to fully offset those effects," he said.

Mohamed El-Erian, chief economic adviser at Allianz, agreed that cutting interest rates is unlikely to spur business investment.

"Lower interest rates would be like pushing on a string," he said.

What would help is an end to the trade war. And in recent days there have been signs of a possible thaw in trade relations between the U.S. and China. Trump delayed raising tariffs on Chinese imports by two weeks, and China waived some tariffs on U.S. farm products. Still, it's not clear a wider trade truce is imminent.

"Right now that's all talk," said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "We have seen that before. We've seen encouraging talk. And then both the markets and business leaders and consumers — everyone — ends up being disappointed. Because not only is there no trade truce. It actually ends up being ratcheted higher."

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DAVID GREENE, HOST:

The Federal Reserve is expected to try to pump a little more air into the tires of the U.S. economy today. Those tires have been showing some signs of a slow leak, and central bankers are hoping to avoid an economic flat. The Fed's widely expected to cut interest rates for only the second time since the Great Recession. But it's not clear that's the boost the economy needs right now.

Here's NPR's Scott Horsley.

SCOTT HORSLEY, BYLINE: The Fed will announce its decision on interest rates this afternoon. And economist Kathy Bostjancic of Oxford Economics says financial markets will be both watching and listening - watching for the anticipated quarter-point rate cut and also listening for what Fed Chairman Jerome Powell has to say about it.

KATHY BOSTJANCIC: Powell just has to be very clear that we are going to do whatever it takes to sustain the expansion.

HORSLEY: Powell's been trying to send that message. He told an audience in Switzerland this month the Fed is not predicting a recession. But he acknowledged the economy could stall if the ongoing tariff war rattles enough businesspeople to the point where they stop spending.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: Uncertainty around trade policy is causing some companies to hold back now on investment. And so our obligation is to use our tools to support the economy. And that's what we'll continue to do.

HORSLEY: Powell and his colleagues also pointed to trade uncertainty back in July, when they cut interest rates for the first time in more than a decade. The stock market wasn't satisfied, in part because Powell seemed to suggest at the time that might be the last rate cut for a while. Bostjancic says she's hoping for not only an additional rate cut today, but a signal about more cuts in the future.

BOSTJANCIC: It will be clear it's not one and done. But he has to be careful that it's not two and done. He needs to leave the door open clearly to future rate cuts.

HORSLEY: Bostjancic is actually predicting two more rate cuts in October and December. But even with that extra push from the Fed, she thinks economic growth will slow next year to just 1.6%. The trade war isn't the only economic speed bump. You've also got slowing growth in other countries, the dwindling effects of the 2017 tax cut and, after the weekend attack in Saudi Arabia, uncertainty about oil prices.

Nervous about a slowing economy, President Trump has been browbeating the Fed to cut interest rates more aggressively to zero or even lower. Others, including former New York Fed president Bill Dudley, have argued the central bank should stand pat and let Trump feel the political fallout from the trade war he started. Powell has repeatedly insisted the Fed will not be swayed by political pressure from either side.

(SOUNDBITE OF ARCHIVED RECORDING)

POWELL: Political factors play absolutely no role in our process. And my colleagues and I would not tolerate any attempt to include them.

HORSLEY: The stock market is counting on a rate cut today and would likely suffer a sell-off if Powell and his colleagues don't deliver. But economist Matthew Luzzetti of Deutsche Bank says it's not clear lower interest rates will do much to help the nation's struggling factories.

MATTHEW LUZZETTI: We see the driving force of the slowdown, certainly in manufacturing, as trade uncertainty. And cutting the Fed funds rate is not going to be able to fully alleviate that uncertainty.

HORSLEY: Factories and others have cut back on investment, not because it's too expensive to borrow money, but because they're not sure they can sell their products. In that environment, Luzzetti says, cutting interest rates can only do so much. What would help is an end to the trade war. And in recent days, there have been signs of a possible thaw in U.S.-China trade relations. Still, Bostjancic says she's not convinced a trade truce is imminent.

BOSTJANCIC: Right now, that's all talk. You know, we have seen that before. We've seen encouraging talk. And then, both the markets and business leaders - and consumers - everyone ends up being disappointed because not only is there no trade truce, it actually ends up being ratcheted higher.

HORSLEY: The president has already ordered another tariff increase on Chinese imports in mid-October if no agreement is reached before then.

Scott Horsley, NPR News, Washington.

(SOUNDBITE OF SONIC YOUTH'S "DISCONNECTION NOTICE") Transcript provided by NPR, Copyright NPR.