WASHNGTON - The Federal Reserve made a modest reduction in interest rates Wednesday in an effort to keep the U.S. economy strong, a measured approach that stopped far short of the dramatic action President Donald Trump has demanded for months.
In an extremely unusual move, Trump blasted the Fed's announcement within minutes, targeting Fed Chair Jerome Powell.
"Jay Powell and the Federal Reserve Fair Again," Trump wrote on Twitter. "No 'guts,' no sense, no vision! A terrible communicator."
The small, quarter-point reduction was meant to address fears about slowing growth in Europe and parts of Asia, as well as concerns that Trump's trade war would remain a drag on growth well into the future. But a majority of the Fed's voting members signaled they had no immediate plans to continue lowering interest rates this year, saying instead that it would "act as appropriate" to keep the economy growing.
The Fed's decision, which was not unanimous, comes at a pivotal time for the central bank, the economy and even the White House. Fed officials are trying to help keep the economy growing without fanning inflation or squelching growth. The economy is sending mixed signals about whether it might slow markedly next year or continue chugging along. And Trump believes a strong economy is key to his reelection in 2020. He has tried to frame the Fed as a primary culprit if there's any slowdown.
The U.S. benchmark interest rate is now in a range of 1.75 to 2%, down from a range of 2 to 2.25% before the cut. The reduction was widely expected but stood in sharp contrast to the "big" cut Trump has recently advocated. Trump has recently called for lowering the benchmark rate to zero, or even pushing it negative as a way to lure investment to the United States.
Only 7 of the 17 Fed leaders penciled in another rate cut this year, according to new economic forecasts released Wednesday. The rest predict rates will stay where they are - or rise.
The Fed painted a mostly upbeat picture of the economy, saying the job market remains "strong" and consumer spending is "rising at a strong pace." The Fed predicts the economy will grow 2.2% this year, weaker than the roughly 3% target that White House officials have cited. The economy grew 2.9% in 2018.
Fed leaders have characterized these rate cuts as insurance to protect the economy against the global slowdown and worsening trade war. Fed officials traditionally raise interest rates when the economy is growing as a way to combat inflation, and they tend to cut interest rates when they are guarding against a downturn as a way to try and provoke more borrowing and spending in the economy.
"Uncertainties about this outlook remain," the Fed wrote in a statement Wednesday announcing the new interest rate. "Although household spending has been rising at a strong pace, business fixed investment and exports have weakened."
The U.S. economy is in a tricky place, and Fed leaders remain divided over what to do. Consumers keep spending, but the U.S. manufacturing sector is struggling and business investment has collapsed as many companies fear Trump's trade war won't be resolved anytime soon. Trump's trade standoff with China has been a particular concern. The president has repeatedly dialed up and then dialed back threats and penalties against China in the past year as a way to try and force one of the world's largest economies to make major changes to its economic relationship with the U.S.
Trump has recently said that he thinks he will eventually reach a deal with China, but it might not come until after the 2020 elections. He has already imposed tariffs on more than $250 billion in Chinese imports and larger penalties are set to kick in next month and then even more in December.
Some economists have even questioned whether the Fed should be reducing rates at all given how healthy the economic fundamentals look. Two out of the 10 members of the Fed's committee that determines interest rates voted against the cut, preferring to leave rates unchanged. On the flip side, one member dissented against the latest decision because he felt the Fed should have cut rates by half a percentage point.
Since the Fed's last meeting on July 31, Trump has tweeted or retweeted 43 times criticizing the central bank and calling for deeper rate cuts. He has called Powell a "bonehead" and "enemy" for not lowering rates faster.
Trump wants rates down to at least 1.25% -- or possibly even negative as they are in Europe and Japan, parts of the world that are struggling with anemic growth. But most economists think the U.S. economy remains in relatively good shape.
"Powell has the votes for a quarter-point cut, but he can't commit to anything else," said Diane Swonk, chief economist at Grant Thornton. "He can't promise additional rate cuts, which will disappoint the market."
Growth is slowing, but to a pace most economists think is the Goldilocks level. Similarly, hiring has cooled, but there's still enough people getting jobs that the unemployment rate is likely to stay under 4% for the next year. Inflation is running below the Fed's target, but most people do not mind if the cost of living rises at a more moderate pace.
The big concern is that the U.S. economy is in danger of catching the same cold that Europe, Japan and other nations have. Those nations have been heavily impacted by the trade war, but they are far more dependent on trade than the United States is. The U.S. economy is powered largely by consumer spending, and so far, that remains robust.
The attack on Saudi Arabia's oil fields over the weekend was yet another reminder of geopolitical risks around the world that are causing American businesses to hold back on investments and could cause consumers to do the same.
The Fed said it would "act as appropriate to sustain the expansion."
In additional to geopolitical headwinds, the Fed is also struggling to control a key part of the financial system. Banks and financial institutions are supposed to hold sufficient levels of capital to finance their daily activities, but some days they find themselves a little short -- or a with a little extra than they need.
Banks that are short turn to the overnight "repo" market to borrow money from the Fed at low interest rates, but there was so much demand this week that the repo rate spiked to 8%, a level not seen since the financial crisis.
"Lots of people are drawing parallels to 2008. Lehman caused this problem and it revealed tons of leverage in the system. Is this the same thing? No, net yet," said Jeffrey Gundlach, head of bond house DoubleLine Capital, in a presentation to investors Tuesday.
The Fed has been making additional funds available in the repo market the past two days in an effort to calm the market down and lower the cost of borrowing for financial institutions. On Wednesday, the Fed said it will target getting the borrowing rate in that market down to 1.7% going forward, even lower than this summer.