The Federal Reserve cut its key interest rate by one-quarter of a percentage point on Wednesday, marking the first such reduction in 11 years and providing an extra boost to the domestic economy as it faces the headwinds of a global economic slowdown.
The highly anticipated announcement came at the conclusion of a two-day meeting in Washington of the Federal Open Market Committee, the central bank’s monetary policymaking arm.
While Fed Chairman Jerome Powell has acknowledged the strength of the nation’s economy — the current 10-year economic expansion is the longest on record, unemployment stands at a near-historic low of 3.7 percent, and the stock market continues to chalk up record highs — Wednesday’s move is an attempt to guard the economy against increasing geopolitical tensions, the potential impact of Brexit, and fallout from President Donald Trump’s protracted trade war with China.
The last time the central bank slashed the rate was in December 2008, during the Great Recession. Rates remained at levels near zero for seven years before the Fed began a series of increases, beginning in December 2015.Since then, the Fed has hiked the interest rate a total of nine times as it steered the economy back into neutral after the financial crisis.
Trump has relentlessly pressured the Fed to slash rates, telling reporters on Tuesday that hikes made by the central bank came “far too early and far too severely,” noting that it “puts me at somewhat of a disadvantage,” compared to economies whose central banks who have already cut their rates.
Powell has continually stressed the independence of the Fed from political pressure, walking a fine line between appearing to appease the president while also parsing economic metrics that indicate a possible downturn.
“You want central banks to make what is the best decision possible for the economy and the broader markets. That opinion should not be influenced by political developments,” Joseph LaVorgna, managing director and chief economist of the Americas at Natixis, said.
The new interbank lending rate is now set at a range of between 2 percent and 2.25 percent. That benchmark is used by financial institutions to determine interest on consumer debt such as credit cards, car loans and home equity loans. Lower rates generally spur further business investment and increase consumer spending.
Wall Street, anticipating a rate cut of between 0.25 and 0.5 percentage points, had already priced in the reduction. Chairman Powell will hold a press conference at 2:30 p.m. ET.