Federal Reserve Issues First Rate Cut In 11 Years

In a move that was widely expected, the Federal Reserve issued its first 0.25% interest rate cut since 2008 on Wednesday. Despite the cut, the Fed reassured investors that the U.S. economy is solid and the labor market remains strong.

“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 Fed said in a statement.

The Fed also decided to end its balance sheet asset sales prior to its previous September target date.

The Fed reiterated its previous position that the U.S. labor market is strong and jobs growth is solid, but it does anticipate a rate cut coming in 2020. Eight of the 10 members voted for the June rate cut, with Boston Fed chair Eric Rosengren and Kansas City Fed chair Esther George representing the two dissenting votes.

The Federal Reserve has been under pressure all year from President Donald Trump to cut interest rates, raising concerns about the Fed’s independence.

“The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!” Trump tweeted on Monday.

Global Slowdown

The Fed decision comes after global growth rates have been under pressure in recent quarters..

Earlier this month, the International Monetary Fund cut its 2019 global growth forecast for the second time this year from from 3.3% to 3.2%. The IMF specifically mentioned international trade disputes as a headwind to global economic growth.

Last week, the Bureau of Economic Analysis reported second-quarter U.S. GDP growth of 2.1%, above consensus forecasts of 1.8% but down from 3.1% in the first quarter.

This week, Japan cut its 2019 GDP growth forecast from 1.2% to 0.9%, citing trade tensions between the U.S. and China weighing on export demand.

Markets React

The SPDR S&P 500 ETF Trust SPY traded slightly lower after the Fed announcement reassured investors that the economy is on solid footing and the Fed is willing to act with additional rate cuts if needed.

The yield on 10-year U.S. Treasury bonds declined slightly on Wednesday to 2.035%, near its lowest level since late 2016.

"Given the risks around Brexit, the U.S.-China trade war and a potential automotive tariff war, the reduction in the Federal Funds rate now better aligns the U.S. central banks with the broader global central bank rate cut cycle that is currently underway," said Joe Brusuelas, chief economist at RSM US LLP.

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Photo credit: Dan Smith - Own work via Wikimedia Commons