Fed Cuts Mark End of an Era

Author: Nikki-Lee Birdsey

Estimated read time: 3 minutes

Publication date: 2nd Aug 2019 22:29 GMT+1

The U.S. Federal Reserve said it would cut interest rates by a quarter point on Wednesday afternoon, the first rate cut since 2008, marking the end of an era.

When the Federal Reserve cut rates to zero in 2008, it was an extraordinary move to try to prevent an economic crash that became known as the Great American Recession, and the Global Financial Crisis. Unlike 2008, Wednesday’s decision by Fed Chair Jerome H. Powell was seen as more of a precautionary measure to aid the favorable U.S. economy, and protect it from slowing growth in China, partially due to the ongoing U.S.-China trade dispute.

Slowing Global Economic Growth

The move was also seen to protect the U.S. economy from slowing growth in Europe, as the British pound fell to a 28-month low as investors reacted negatively to the newly appointed British Prime Minister Boris Johnson. Sterling ped below $1.23 against the U.S. dollar and fell even more drastically against the euro to below €1.10 on the international currency markets on Monday. Some have speculated that Boris Johnson’s escalating no-deal Brexit rhetoric has panicked investors, according to the Guardian.

Fed Chair Mr. Powell said at a news conference on Wednesday afternoon, “The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook.” Powell was frank about the reasons for the small cut as it was “intended to ensure against downside risks from weak global growth and trade tensions.” Mr. Powell elaborated further: “It’s not the beginning of a long series of rate cuts - I didn’t say it’s just one ... What we’re seeing is that it’s appropriate to adjust policy to a somewhat more accommodative stance over time, and that’s how we’re looking at it.”

Trump and Market Response

The small cut disappointed President Trump who publicly critized Mr. Powell on Twitter in a series of tweets. One tweet read, “....As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”

The S&P 500 Index fell 1.8% over the course of the afternoon—the most since May 31—before closing at 1.1%. The Dow Jones Industrial Average also lost 1.2% and the Nasdaq 100 Index fell 1.2%.

Bottom Line

Economic uncertainty amid the President’s trade policies, and his public pressure on the central bank, have urged a small cut although two Fed officials dissented. The U.S. economy remains favorable with the lowest unemployment rate in 50 years, among other positive indications, but it has slowed this year due to trade disputes and other factors. In a bid to continue the U.S.’s record-long economic expansion, the Fed has made a marginal rate cut, perhaps signalling the end of an era.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.