NEW YORK (Reuters Breakingviews) - The Federal Reserve has turned. The U.S. central bank on Wednesday cut its target overnight interest cost by a quarter percentage point, to a range of 2% to 2.25%. For some, like U.S. President Donald Trump, that’s surely not enough. For others – and going by most economic statistics – it’s too much. Fed Chairman Jerome Powell has found another way to please nobody.
The last federal-funds rate reduction was in 2008, as the financial crisis cut deep. It then bounced along near zero for seven years before Powell’s predecessor, Janet Yellen, oversaw the start of a period of gradual rate hikes in late 2015. Since a quarter-point hike last December, the Fed had held steady at 2.25%-2.5%, until now.
The proximate causes of the move are external – mainly the threat to economic activity from Trump’s confrontational stance on trade. It’s a telling irony that a president who claims the Fed is damping the benefits of his policies by holding rates too high is providing one of the few reasons for the U.S. central bank to cut them. Wednesday’s modest move by the Federal Open Market Committee surely won’t satisfy him.
Yet seen through the lens of the Fed’s dual mandate – full employment and stable prices – everything is still humming as the longest expansion in U.S. history enters its second decade, with economic growth steady, unemployment at historic lows and inflation tame. Prices increased just 1.4% in the year to June by the personal consumption expenditures measure, released on Tuesday. The Fed would prefer inflation nearer its 2% target but that’s a somewhat flimsy rationale for lower rates given the backdrop.
A significant minority of traders, meanwhile, expected a half-point cut, according to CME data, so they’ll be disappointed, too – even though buoyant stock and credit markets are hardly crying for help. Two of Powell’s colleagues also dissented, preferring not to cut rates, so they’re unhappy for a different reason.
With everyone unsatisfied, the question is what happens next: Was this a “one and done” insurance-like rate cut, or a more dovish decision that’s just the beginning? The FOMC’s statement is equivocal, and on recent precedent interpreting Powell’s press conference may not provide a clear answer, either. Besides, the Fed is still “data-dependent” – as it should be, whether that makes anyone else happy or not.
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