The Federal Reserve is slashing its benchmark interest rate on Wednesday for the third time this year to help sustain US economic expansion in the face of widespread trade tensions and slowing global growth.
But Fed policymakers are likely to frustrate anyone hoping to clearly indicate what they might do next. Economists said the central bank may prefer to keep its options open. Analysts predicted that the Fed would cut its short-term rate – which affects a wide range of consumer and commercial loans – by a quarter percentage point from 1.5% to 1.75%. This third cut would almost reflect the four Fed rate hikes last year in response to the strengthened economy.
That was before the rising global risk led the Fed to change course and start easing credit. The purpose of reducing interest rates is to encourage more borrowing and spending. Jerome Powell said central bank rate cuts are meant to be a form of insurance against threats to the economy, particularly from President Donald Trump’s trade war with China and weak growth in Europe and Asia. Powell noted similar reductions in 1995 and 1998 as precedents. In both cases, the Fed cut interest rates three times.
The Fed will also consider the consequences of lower inflation expectations. Lower inflation expectations can be self-fulfilling. This is a problem for the Federal Reserve because its preferred inflation gauge has remained below its 2% target for most of the past seven years.
At the same time, Trump renewed his attacks on the Fed on Twitter, for not lowering its benchmark closer to zero. Trump contradicts the Fed’s actions with central banks in Europe and Japan that have cut rates to negative levels.
Although Trump has suggested that this puts the United States in an unfavorable position to compete, most economists see negative interest rates as a sign of weakness. Some international tensions have eased since the last Fed meeting in mid-September, which may suggest that other price cuts are less necessary. The United States and China reached a temporary trade truce earlier this month and are working together on a tentative agreement that Trump and President Xi Jinping could sign in November.
Another source of international tension is Brexit, which has also eased. The European Union agreed on Tuesday to postpone the deadline for Britain’s exit from the European bloc to 31 January from 31 October.
The US labor market remains strong with the unemployment rate at only 3.5%, the lowest in 50 years. A steady increase in employment and wages should help boost consumer spending in the coming months while keeping the economy expanding. This could keep the Fed on the sidelines of future meetings.
The housing market also improved after falling in 2018, thanks in part to Fed rate cuts. Mortgage rates have fallen by more than a percentage point for an average 30-year fixed rate loan. This has helped increase existing home sales while new home sales have increased.