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The Federal Reserve cuts rate by 25 basis points on “global developments” and “muted inflation”

Nigel Firth
Nigel Frith trader
Updated 27 Oct 2020

  • Overnight lending rate lowered to 2% by Federal Open Marketing Committee on Wednesday, first cut in almost 11 years
  • Fed rules out long cycle of reductions but committed to acting “as appropriate to sustain” economic expansion
  • Muted response from financial markets, Trump and investors disappointed more easing is not on the horizon

The Federal Reserve cut its benchmark rate by 25 basis points on Wednesday as it moved to stimulate economic growth amid “global developments” which may weigh on the economic outlook and “muted inflation pressures”. It was the first reduction in more than a decade.

Intervention by the central bank at the latest policy meeting was widely expected, and there was a muted response to the announcement across financial markets, which remained steady overnight. However, President Donald Trump renewed his attack on Jerome Powell by claiming the Fed Chair had “let us down”.

Trump wanted an initial deeper 0.5 percentage point cut followed by more quantitative easing, but the Fed said it has already ruled out a long cycle of reductions. Powell believes such action is not required as there is no evidence of “real economic weakness”, though he noted the bank would remain proactive.

On the latest 0.5% cut, the Fed said in a statement: “This action supports the committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric 2% objective are the most likely outcomes, but uncertainties about this outlook remain.”

The decision to lower the target range for the Fed Funds rate to between 2-2.25% was not backed by all ten members of the monetary policy committee as two opted to dissent. While a cut has been on the cards for some time now, interested commentators have debated whether it was needed at all due to the strength of the US economy.

While the Fed is not eager to intervene on a regular basis moving forward, it is open to further cuts if they are required to “sustain” expansion. It will also keep track of incoming data to inform its decision. UBS Wealth Management’ global chief investment officer, Mark Haefele believes low inflation gives the Fed the ability to “take preemptive steps”.

He added: “Because they did only 25 basis points, they avoided doing what some would have felt was more shock and awe with 50 basis points. So, they can move towards language like ‘data dependent’ now that they’ve shown they are prepared to be flexible.”

Markets were relatively unchanged after the Fed’s announcement, but US stock futures did move higher on Thursday morning. Contracts tied to the Dow Jones advanced 42 points, while Nasdaq futures and S&P 500 futures climbed 16.25 and 3.45 points, respectively. The Dow had slumped 1.23% to 26,864 late on Wednesday.

Nigel Firth
Nigel has been in the regulated financial services industry for nearly a decade, has previously owned a financial brokerage and has written many times for sites relating to personal finance and trading.