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US Fed cuts interest rate for the second time in a row: Top 4 highlights

Fed chairman Jerome Powell
The US Federal Open Market Committee (FOMC) of the Federal Reserve on Wednesday delivered second rate cut in a row, slashing interest rates by 25 basis points on the back of global uncertainties. The rate now stands in the range of 1.75-2 per cent.

While US consumers continued to make big purchases owing to an uptick in wages, unresolved trade negotiations between the United States and China have dampened business investment and slowed the manufacturing sector, Fed chairman Jerome Powell said during the press conference.

The US equity markets ended marginally higher during the overnight trade on Wednesday as the policy statement dimmed hopes for further rate cuts and fell short of the more aggressive reduction in borrowing costs that President Donald Trump had demanded.  

The Dow Jones Industrial Average rose 36 points, or 0.13 per cent, to 27,147, the S&P 500 gained 1.03 points, or 0.03 per cent, to 3,007, and the Nasdaq Composite dropped 8.62 points, or 0.11 per cent, to 8,177.

In a tweet, Donald Trump slammed Fed chairman Jerome Powell for “failing to deliver” on the rate cut front.

Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!

— Donald J. Trump (@realDonaldTrump) September 18, 2019
Here are the key highlights from the policy decision:

Split vote: Moderate economic activity, weak business fixed investment and exports, and global uncertainties promoted the Fed to lower the key interest rates, a second since the recession of 2008.

The rate cut, Powell said, was decided after global growth slowed and trade tensions worsened in the past months.

While seven FOMC members, including Powell, voted in favour, one member pitched for a 50 bps cut, while two members proposed status quo.

The breakdown of the split suggested that most Fed officials still see a rebound in economic growth as their base case scenario, which meant any further rate cuts could be limited, The Guardian reported, quoting analytical firm Capital Economics.

No hints at further rate cuts: Firm jobs market, low unemployment rate, muted inflation and strong household spending could push the Federal Reserve to hold rates in the future.

“If the economy does turn down, then a more extensive series of rate cuts could be appropriate. We don't see that. We don't expect that,” Powell said during the press conference.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective, the Fed said in a statement.

According to the Fed’s “dot plot” of individual expectations, five members thought the FOMC should have held its previous range of 2 per cent to 2.25 per cent, five approved of the 25 bps cut but keeping rates there through the rest of the year, and seven favored at least one more cut this year, Bloomberg reported.

Economic outlook: The FOMC expects the US economy to grow slightly stronger than previously expected, at a 2.2 per cent rate, and unemployment could hold steady at 3.7 per cent. In June, the Fed had forecast that the economic growth for the year would stand at 2.1 per cent with unemployment at 3.6 per cent.

Inflation projections were unchanged at 1.8 per cent for 2019 and 2.5 per cent over the longer run.

Fears of an economic recession have gripped the US economy as trade ties between Washington and Beijing worsened during the past few months. With no firm trade deal in sight, uncertainties continue to mount.

In response, Powell said, the central bank would do what is needed to maintain the recovery, but he views these cuts as a “mid-cycle adjustment” and “not part of a more aggressive strategy” to drive rates lower.

Liquidity push: The Fed also cut the interest it pays to banks on cash reserves above the required level by 30 basis points to 1.8 per cent, in a bid to push more cash into markets.

“The New York Fed's decision to spend more than $125 billion in the overnight borrowing, markets ensured crucial bank lending is running smoothly,” Powell said.

He said he does not believe the market's cramping means there is contagion in the economy and he thinks the Fed can solve the "temporary" problems in the market.

A cash shortage in recent days prompted the New York Fed on Tuesday and Wednesday to pump $128 billion in funds into the short-term market as interest rates soared and threatened to break out of the Fed's target range.

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