Citing “the implications of global developments for the economic outlook as well as muted inflation pressures,” the bank lowered its federal funds rate by a quarter of a percent from 2.25-2.5 percent to 2-2.25 percent.
The last time the Fed cut interest rates? December 2008 – when the American economy was plunging headfirst into the Great Recession.
Since U.S. president Donald Trump was elected in November 2016, the Fed has raised its federal funds rate eight times from a range of 0.5-0.75 percent to a range of 2.25-2.5 percent. Meanwhile it has raised its discount rate from 1.25 percent to three percent.
Rates were raised just once during the entire eight years former U.S. president Barack Obama was in office – prompting Trump to accuse the central bank of playing politics with the economy.
Interest rates matter because they dictate the cost of borrowing. The Federal Reserve uses them to alternately fan the flames of the economy when growth is too slow – or to put a damper on things if economic activity starts expanding too rapidly (leading to abnormally high inflation).
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Under chairman Jerome Powell, rates were expected to rise steadily throughout 2019 – but sluggish growth has put the kibosh on those plans. Now the question is whether the central bank will continue cutting rates over the coming months – and if so, by how much.
That will depend in large part on what happens with the American economy …
Gross domestic product expanded at a 2.1 percent clip during the second quarter of 2019 – cooling considerably from the revised 3.1 percent growth rate it achieved during the first quarter of the year.
Meanwhile growth from 2018 – which was previously measured at 2.9 percent – was revised downward to 2.5 percent. Growth from 2017 was revised upward to 2.8 percent.
According to the Atlanta Federal Reserve’s GDP Now estimate, growth is currently forecast at 2 percent for the third quarter of 2019.
In discussing the second quarter results, Trump lamented “the very heavy weight of the Federal Reserve anchor” – referring to previous rate hikes.
In the aftermath of the Fed decision to cut rates, Trump was unforgiving.
“Experts stated that the Fed should not have tightened, and then waited too long to undo their mistake,” he tweeted.
As of this writing, Trump joins Obama and Herbert Hoover as the only American chief executives who have failed to preside over at least one year in which the economy expanded at a rate of three percent or higher.
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