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Fed cuts interest rates, discord continues

September 19, 2019

The US Federal Reserve has cut interest rates twice in the last decade, both coming in the last seven weeks. Yet for Donald Trump and some dissenting voices, it's nowhere near enough.

Federal Reserve Board Chair Jerome Powell with US President Donald Trump
Image: Getty Images/D. Angerer

The Federal Reserve cut US interest rates marginally on Wednesday, the second cut this year.

However, the 0.25 cut, which leaves interest rates in a range of 1.75 to 2 percent, faced criticism from US President Donald Trump, who wants steeper cuts over a sustained period.

In its statement, the Fed showed no indication of a major policy shift from its July statement, suggesting this could be the last cut until at least the end of 2020 barring a dramatic shift in the US economy.

The Federal Reserve Open Market Committee "will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective," the statement said.

As practically all recent Fed statements have, it drew the immediate ire of Trump, who tweeted:

"Jay Powell and the Federal Reserve Fail Again. No "guts,” no sense, no vision!  A terrible communicator!"

Disagreement but markets show little reaction

Aside from Trump, there is believed to be some disagreement within the Fed Committee over how steep the latest cuts should have been, the Financial Times reports.

"Sometimes the path ahead is clear, and sometimes less so," Fed chairman Jay Powell said in his post-meeting press conference. "This is a time of difficult judgments, as you can see, disparate perspectives. I really do think that's nothing but healthy."

While the latest cut was largely anticipated by investors, the US central bank's longer-term forecasts regarding cuts are more conservative than markets had expected. The rate-setting committee's expectation is that rates will still be at their current level by the end of 2020.

There was little reaction from early Asian trading on the back of the latest rate cut. Hong Kong's Hang Seng index and mainland China's CSI 300 stayed at similar levels although Japan's benchmark Topix index rose by just over 1 percent while the yen slipped against the US dollar to its weakest level in six weeks.

Fed pumps money into financial system

The Fed's September statement came during the same week as the central bank stepped into financial markets for the first time in a decade to keep interest rates on short-term lending from creeping above its target range.

The New York Federal Reserve conducted money market interventions by facilitating so-called "repo" or repurchase agreements for banks, whereby banks borrow by putting up assets like Treasury notes as collateral and then repay the loans with interest the following day.

This allows banks to replenish their cash holdings they keep at the Fed whenever the amount falls below the Fed's required minimum.

Through these "repo" operations, the New York Fed pumped fresh liquidity into the system to the tune of $53 billion on Tuesday, $75 billion on Wednesday, with another $75 billion planned for Thursday.

aos/kd (AFP, Reuters)