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Fed Cuts Interest Rates By Another Quarter Point, But Divided On Future Stimulus

Topline: In line with market expectations, the Federal Reserve cut interest rates to the 1.75% to 2% range on Wednesday in its effort to protect the U.S. economy against uncertainty over trade and slowing global economic growth.

  • The central bank concluded its two-day meeting with Chair Jerome Powell announcing the rate cut, which will be the second consecutive one this year following a “mid-cycle adjustment” earlier in July.
  • Fed officials voted 7-3 in favor of the quarter point rate cut, indicating more division than was expected. Seven out of 17 Fed officials favor another rate cut by the end of this year, but the outlook gets hazier in 2020 with at least two officials expecting a rate hike.
  • “We took this step to keep the economy strong,” Powell explained in his opening remarks. The Fed indicated it will “act as appropriate” to sustain the economy’s “moderate rate” of expansion.
  • The move to lower rates was a source of contention within the Fed’s boardroom, as opinions differed over mixed U.S. economic data and whether to institute more quantitative easing.
  • The market had already priced in dovish expectations for another rate cut, so the news doesn’t come as a shock—but the Fed’s division over future rate policy was greater than expected and will add to investor uncertainty.
  • The quarter-point rate cut also aggravated President Trump, who has repeatedly criticized the central bank’s monetary policy. He recently called for rates to be reduced to “ZERO, or less”—which would create a negative interest rate environment similar to that in Europe and Japan.

Looking ahead: A few more rate cuts could be needed to prop up a slowing U.S. economy as well as reduce pressure on the inverted yield curve. It remains to be seen whether the Fed plans on additional rate cuts beyond this year, as further accommodation could be needed to thwart geopolitical risks including the China trade war, tensions in the Persian Gulf and even Brexit.

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