Fed Cuts Interest Rates for First Time Since 2008 Crisis

ImageThe Federal Reserve cut interest rates for the first time since 2008 as it tried to keep the economic expansion from petering out.
The Federal Reserve cut interest rates for the first time since 2008 as it tried to keep the economic expansion from petering out.CreditCreditJim Lo Scalzo/EPA, via Shutterstock

WASHINGTON — The Federal Reserve cut interest rates for the first time in more than a decade on Wednesday as it attempted to guard the record-long economic expansion against mounting global risks.

The widely expected quarter-point move, the Fed’s first since it cut rates to near zero in 2008, is meant to protect the economy against the potentially harmful effects of a growth slowdown in China and Europe and uncertainty from President Trump’s trade war.

“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,” according to the Federal Open Market Committee’s policy statement.

But the Fed did not indicate that this was the beginning of a rate-cutting campaign, suggesting instead that the cut was a minor adjustment intended to help the economy weather any challenges from slowing global growth and Mr. Trump’s trade fights.

While Jerome H. Powell, the Fed chair, left the door open to additional rate moves if the economy showed signs of sputtering, he did not indicate the central bank was poised to engage in the sort of deep cutting cycle that the Fed has done in the past to avert or offset recessions.

“It’s not the beginning of a long series of rate cuts — I didn’t say it’s just one,” Mr. Powell said at a news conference following the Fed’s two-day policy meeting. “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.”

The widely expected move from the central bank was initially greeted with a shrug in financial markets, where investors have been factoring in a rate cut for months. But the stock market turned lower after Mr. Powell began his news conference at 2:30 p.m., as investors absorbed the chair’s comments as indicating the Fed was unlikely to make additional cuts anytime soon, as investors had hoped.

By the end of the day, the S&P 500 was down 1.1 percent. It was the benchmark index’s worst decline since May 31.

The Fed dropped its target rate to a range between 2 percent to 2.25 percent. Officials also announced an early end to its efforts to shrink the Fed’s balance sheet, another attempt to keep the economy moving. The central bank’s holdings of government-backed bonds swelled during the financial crisis as it bought assets to try to reinvigorate growth. Policymakers have been slowly siphoning off securities to return their balance sheet to a more normal size, and that process was slated to end in September. It will now conclude Aug. 1.

Both Eric Rosengren, the president of the Federal Reserve Bank of Boston, and Esther George, the president of the Federal Reserve Bank of Kansas City, voted against Wednesday’s decision, preferring instead to leave rates unchanged. Those dissents marked the second and third of Jerome H. Powell’s term as chair.

While Fed officials said they expect economic expansion to continue and the labor market to remain strong “uncertainties about this outlook remain.”

Mr. Powell said the Fed’s move was “intended to insure against downside risks from weak global growth and trade tensions.”

He said that manufacturing around the world was weakening and that Mr. Trump’s trade dispute was continuing to spook American businesses. “The ongoing uncertainty is making some companies more cautious about their capital spending,” he said.

Officials did not indicate in their statement whether this cut would be followed by additional moves. The Fed’s June economic projections suggest policymakers envision cutting rates slightly to shore up the economy, rather than beginning an easing cycle that will return rates to zero.

“As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the Fed said in its statement, seemingly leaving its options open.

Mr. Powell said the committee viewed the move as a “mid-cycle adjustment to policy,” suggesting that the Fed sees this cut as more similar to two instances in the 1990s, during which the Fed moved rates down slightly to get the economy through periods of uncertainty, rather than the beginning of a rate-cutting campaign.

The Fed’s rate cut carries political risks, given Mr. Trump’s attacks on the central bank. Mr. Trump has been denouncing the Fed in speeches and on Twitter for the past year, criticizing its four 2018 rate increases and blaming its policies for slowing the American economy. Some onlookers may see Wednesday’s move as caving to the president.

The Fed operates independently of the White House. It attributed the change, which officials have been signaling for months and which investors fully expected, to growing economic concerns.

“We also don’t conduct monetary policy to prove our independence,” Mr. Powell said.

The central bank is trying to extend a record-long economic expansion, because officials believe that doing so will allow the Fed to achieve its goals of maximum employment and slow but steady inflation. The unemployment rate is hovering around its lowest level in 50 years, but that has yet to push wages dramatically higher in a way that forces companies to lift prices more quickly.

Inflation has run shy of the Fed’s 2 percent goal since the central bank formally adopted it in 2012. A little inflation helps to grease the wheels of a healthy economy, allowing businesses to raise wages faster and lifting interest rates, giving the central bank more room to cut in the event of a downturn.

Prices picked up just 1.6 percent in the year through June, not counting volatile food and fuel costs.

Wages are growing only moderately. An index of employment costs climbed by 2.7 percent in the second quarter from a year earlier, less than expected and a slowdown from earlier in 2019, according to data released on Wednesday.

Global policy uncertainty has also increased, and manufacturing is slumping the world over. Growth is slowing in China and Europe, and Mr. Trump’s trade war with China and threats of further tariffs on United States trading partners are stoking uncertainty and causing businesses to hold off on investment.

Those developments threaten the economic outlook, even as growth remains solid, consumer spending is robust and the job market holds up for now.

Matt Phillips contributed reporting from New York.