Fed lowers interest rates as expected, leaves door open to further cuts

WASHINGTON (Reuters) - The Federal Reserve cut interest rates on Wednesday for the first time since 2008, citing concerns about the global economy and muted U.S. inflation, and signaled a readiness to lower borrowing costs further if needed.

Financial markets had widely expected the quarter-percentage-point rate cut, which lowered the U.S. central bank’s benchmark overnight lending rate to a target range of 2.00% to 2.25%.

In a statement at the end of its latest two-day policy meeting, the Fed said it had decided to cut rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

The Fed said it will “continue to monitor” how incoming information will affect the economy, adding that it “will act as appropriate to sustain” a record-long U.S. economic expansion.

“It’s smart of them to go ahead and take out some insurance here. It’s better than none at all,” said Brett Ewing, chief market strategist at First Franklin Financial Services in Tallahassee, Florida.

U.S. stock prices, which had largely drifted sideways earlier Wednesday as investors awaited the meeting's outcome, dipped after the Fed's statement. The benchmark S&P 500 Index .SPX was down fractionally after briefly falling to the day's low.

Heading into Wednesday, the index was up about 3% since June 19, when the Fed first signaled a rate cut was likely as it pledged then to act as appropriate to sustain the expansion.”

Yields on U.S. Treasury securities rose as the bonds’ prices, which move in the opposite direction, fell. Ten-year US10YT=RR note yields edged up to about 2.04%, while yields on 2-year notes US2YT=RR, a proxy for Fed policy rates, rose to 1.86%.

The U.S. dollar index .DXY gained ground to touch its highest in more than two years. The index, which measures the greenback against a basket of currencies, was up about 0.20% on the day.

TWO ‘NO’ VOTES

The decision drew dissents from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George who argued for leaving rates unchanged.

Both have raised doubts about a rate cut in the face of the current expansion, an unemployment rate that is near a 50-year-low, and robust household spending.

On the opposite flank, U.S. President Donald Trump is likely to be disappointed the Fed did not deliver the large rate cut he had demanded. Trump has repeatedly harangued the central bank and Fed Chairman Jerome Powell for not doing enough to help his administration’s efforts to boost economic growth.

Powell and other Fed officials in recent weeks have walked a middle ground, flagging risks like continued uncertainty on the global trade front, low inflation and a weakening world economy, but repeating the view the United States is fundamentally in a good spot.

Powell is expected to elaborate on the Fed’s thinking in a news conference at 2:30 p.m. EDT (1830 GMT).

The Fed said in its statement that it continued to regard the labor market as “strong” and added that household spending had “picked up.” But it noted business spending was “soft” and that measures of inflation compensation remain low.

The Fed said the rate cut should help return inflation to its 2% target but that uncertainties about that outlook remain. Sustained expansion of economic activity and a strong labor market are also the most likely outcomes, the Fed said.

Underscoring its decision to ease policy across the board, the Fed also said it would stop shrinking its massive holdings of bonds starting Aug. 1, two months ahead of schedule.

“I think ending the quantitative tightening right here was also a good call,” First Franklin’s Ewing said.

Reporting by Ann Saphir and Jason Lange; Editing by Paul Simao and Dan Burns.

Panorama Hispano is the regional news and information newspaper for Hispanic and other diverse communities.

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