US Federal Reserve chair Jerome Powell. Picture: MANDEL NGAN / AFP
US Federal Reserve chair Jerome Powell. Picture: MANDEL NGAN / AFP

Washington — The Federal Reserve cut interest rates on Wednesday for the first time since 2008, citing concerns about the global economy and muted US inflation, and signalled a readiness to lower borrowing costs further if needed.

Financial markets had widely expected the quarter-percentage-point rate cut, which lowered the US central bank’s benchmark overnight lending rate to a target range of 2% to 2.25%.

In a statement at the end of its latest two-day policy meeting, the Fed said it had decided to cut rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”.

The Fed said it will “continue to monitor” how incoming information will affect the economy, adding that it “will act as appropriate to sustain” a record-long US economic expansion.

The decision drew dissents from Boston Fed president Eric Rosengren and Kansas City Fed president Esther George who argued for leaving rates unchanged.

Doubts

Both have raised doubts about a rate cut in the face of the current expansion, an unemployment rate that is near a 50-year low  and robust household spending.

On the opposite flank, US President Donald Trump is likely to be disappointed the Fed did not deliver the large rate cut he had demanded. Trump has repeatedly harangued the central bank and Fed chair Jerome Powell for not doing enough to help his administration’s efforts to boost economic growth.

Powell and other Fed officials in recent weeks have walked a middle ground, flagging risks like continued uncertainty on the global trade front, low inflation and a weakening world economy, but repeating the view the United States is fundamentally in a good spot.

Powell is expected to elaborate on the Fed’s thinking later.

The Fed said in its statement that it continued to regard the labour market as “strong” and added that household spending had “picked up”. But it noted business spending was “soft” and that measures of inflation compensation remain low.

The Fed said the rate cut should help return inflation to its 2% target but that uncertainties about that outlook remain.

Sustained expansion of economic activity and a strong labor market are also the most likely outcomes, the Fed said.

Underscoring its decision to ease policy across the board, the Fed also said it would stop shrinking its massive holdings of bonds starting Aug. 1, two months ahead of schedule.

Reuters