A long time coming, Federal Reserve cuts interest rates

The long anticipated day finally came on Wednesday that had long been anticipated, the Federal Reserve's Open Market Committee cut its benchmark interest rate by a quarter of a point to the new rate of 4.00 to 4.25 percent, a move that had been long predicted, and was based on the August Jobs Report by the Labor Dept, that showed non farm jobs drifting downward to  22,000.

“There’s very little growth, if any, in the supply of workers. And at the same time, demand for workers has also come down quite sharply, to the point where we see what I’ve called a curious balance,” Powell said.

Of course this is not enough for President Trump who has long called for a greater cut of at least 3 percent, but which economists have wanted could lead to inflation. And, it’s well known that in this desire the president has pummeled Fed Chair Jerome Powell, and wants to have greater control over the Fed, an independent entity founded in 1913, and has tried to chip away at the board by attempting to fire governor Linda Cook on an alleged fraudulent mortgage claim, that, on appeal, she is allowed to continue to serve; but, Trump wants a ruling, in his favor by the US Supreme Court.

All politics being local “The president frequently accused Powell — a lifelong Republican who was first appointed to his position by Trump — of waging a political battle against his trade policy. Trump also claimed the Fed should help him reduce the costs of paying down the national debt through lower interest rates, triggering alarm among fiscal experts and Fed historians", according  to The Hill.

Wednesday’s decision was characterized by Powell as “risk management”, and underscores the fact that the US economy faces uncertainty with the on again/off again tariffs by Trump, but also is a leverage point in the balancing calculation that the FOMC faces in meeting its twinned mandate, full employment and keeping inflation at 2 percent.

Notably, as they reported, “Powell said that while the Fed expects inflation to increase due to Trump’s tariffs, the bank is seeing the labor market take far more damage under the weight of higher import taxes and steep cuts to immigration.

“Our policy had been really skewed toward inflation for a long time. Now we see that there’s downside risk, clearly, in the labor market, so we’re moving in the direction of more neutral policy.”

That weakening jobs report was an important factor as is the current inflation rate at 2.9 percent, better than its high of 3.0 percent, but not low enough to meet the mandate. And, to that effect, two more rate cuts have been penciled in for the rest of the year.

“Even if inflation remains high … Powell seemed to be willing to give that the benefit of the doubt and, instead, focus on the risk that any incipient weakness in the labor market might gain momentum and prove harder to arrest over time,” economists at LHMeyer/Monetary Policy Analytics wrote in an analysis.”

To note, job growth in the last three months has only been 29,000 and added to the August report was a call to action for the FOMC. but there was one naysayer, Stephen Miran, a Trump appointee, on loan from the chair of the White House Council of Economic Advisors, to fill a recent vacancy, and he did vote no on the current cut, wanting, as did Trump a much larger cut, a half point at least, and would, and will. In the future undoubtedly ask for increased cuts later this year to meet the president’s goal.

Dissension is not unknown in Washington, and Powell, in a news conference said, “There are no risk free paths here,” showing both tact and restraint, but undoubtedly, was discreetly referring to the continued rise, at least for the moment, of increased tariffs but added, “It’s not incredibly obvious what to do.”

The New York Times reported that, “Powell’s final question [from the media] was whether the debate over Fed independence is putting pressure on inflation expectations. He says the market is not factoring in those concerns right now in terms of setting interest rates. He added that surveys have shown that longer-term inflation expectations have been “rock solid” in terms of running at 2 percent over the longer run, but added, “We don’t take that for granted.”

They also reported, “Powell says a quarter point cut in itself won’t “make a huge difference to the economy,” but that the whole path of rates will influence expectations, which will influence the market in turn. It starts with a 25 basis point rate cut, but the market’s also pricing in a rate path, he said. “I’m not blessing what the market’s doing at all. I’m just saying it’s not just one action.”

As we have noted previously, over the tenure of Powell, he is data driven and sees not politics, but data points in chairing the FOMC, and its care of the US economy, a distinction of the American central bank leadership.

In a nod to economic reality, the chair said to the media after the meeting,“Labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant,” and added, “I can no longer say” the labor market is “very solid.”