US central bank cuts rates, notes limits of data
The divided U.S. Federal Reserve cut interest rates by a quarter point and announced it would resume limited purchases of Treasury bonds after money markets showed signs of waning liquidity, a situation the U.S. central bank has vowed to avoid.
The rate cut, which included a reference to data caps the central bank faces during the current U.S. federal government shutdown, sparked opposition from two policymakers; Governor Stephen Miran once again called for a deeper cut in borrowing costs, and Kansas City Fed president Jeffrey Schmid favored no cuts at all given ongoing inflation.
The balance sheet decision will keep the Fed’s total holdings constant from month to month as of Dec. 1, but will shift its portfolio by reinvesting proceeds from maturing mortgage-backed securities into Treasury bills.
The decision to cut the 10-2 policy rate to a range of 3.75 percent to 4.00 percent was expected by investors as a way to ease concerns that the Fed’s labor market policymakers might lose momentum.
However, Fed members acknowledged the limitations created by the government shutdown in their decision-making processes and based their opinions on the unemployment rate on August, the month when the last official job postings were announced, while noting that “current indicators” show that the economy continues to grow at a moderate pace.
Fed chairman Jerome Powell will hold a press conference later Wednesday to discuss the results of the meeting and update his views on the economy, which he says has given policymakers conflicting signals.
Inflation did not rise as strongly as initially expected thanks to U.S. President Donald Trump’s new import taxes, but it still rose to about 2.7 percent in August from 2.3 percent in April, according to the last official estimate released before the shutdown for the Personal Consumption Expenditures Price Index.
The Fed uses PCE to set its 2.0 percent inflation target, and policymakers expected inflation to rise to 3.0 percent by the end of this year in forecasts released in September.
They expect the rise in prices to decline over time as concerns about the strength of the job market grow.
“Downside risks to employment have increased in recent months,” the Fed said in its new policy statement.
The disagreement was the third time since 1990 that policymakers have split in favor of both easier and tighter monetary policy in the same meeting.
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