FOMC Cuts Fed Funds Rate to 2.00-2.25 percent; First Cut in 10 ½ Years

By Mark Lieberman

Managing Director and Senior Economist

Highlights:

  • FOMC cut the target Fed Fund rate to 2.00-2.25 percent

Trend:

  • The cut was the first since December 2008
  • The FOMC had held the fed funds rate at 0-0.25 percent from December 2008 through December 2015.
  • After holding rates at near zero from December 2008 through December 15, the FOMC has raised the target rate nine times.

Source: Federal Open Market Committee

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Despite asserting “that the labor market remains strong and that economic activity has been rising at a moderate rate” the Federal Open Market Committee cut the target fed funds rate Wednesday for the first time in more than 10 years.

The FOMC responded to pressures from President Trump who has been insisting economic growth has been restrained by the FOMC’s interest rate stance. The FOMC has raised the target fed funds rate nine times since December 2015.

The FOMC voted 8-2 to lower rates with only Esther L. George, president of the Kansas City Federal Reserve Bank and Eric S. Rosengren of the Boston Fed dissenting. George and Rosengren, according to the FOMC statement, “preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.”

The last report on the nation’s Gross Domestic Product pegged GDP growth in the second quarter at 2.1 percent (annualized), far below the 3 percent-plus growth rate the President had promised during his campaign. GDP has topped 3 percent (annualized) in four of the 10 quarters since President Trump took office.

The FOMC hailed what it described as a strong economy in the statement announcing its rate decision.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” the Committee said in its statement following a two-day meeting.

The only weakness, the Committee described was business fixed investment.

“Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft,” the FOMC said in its statement. “On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.”

The FOMC operates under a dual mandate: to generate maximum economic growth, generally measured by the unemployment rate, and maintain price stability – inflation.

The FOMC’s rate decision will have little impact on mortgage rates which are generally tied to different interest rate measures but will reduce the prime interest rate, the rate banks charge their best customers. Auto loans and home equity lines of credit are generally tied to the prime which itself is generally three percentage points above the fed funds rate.

The FOMC cited the international economy as justification for its decision to lower the fed funds rate.

“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent,” the Committee said in its statement.

You can hear Mark Lieberman every Friday at 6:20 am on the Morning Briefing on P.O.T.U.S. radio @sxmpotus, Sirius-XM 124. You can follow him on Twitter at @foxeconomics.

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