The Federal Reserve of the United States (Fed) responds to the promise launched to the market and in an unusual action, proceeds to lower interest rates by a quarter-point. It leaves them in a band between 2% and 2.25%. It is a profound change in strategy since this is the first cut in the price of money since December 2008, when it was virtually zero in the financial crisis.
This strategic turn is presented as a preventive adjustment to stimulate economic expansion at a time of uncertainty over Donald Trump’s tariff war and with which he hopes to generate more inflation at the same time.
In addition, Jerome Powell, president of the central bank, advances the suspension of the balance sheet by two months, for this month of July instead of September as planned. This means that it keeps intact the debt assets accumulated during the crisis and ceases to part with them, which is currently around 3.8 trillion dollars. The Fed president said in justifying the double decision that it is a “mid-term strategic adjustment.”
It is the fifth time in the last 25 years that the rate hike in the United States has been reversed, to cut them. It is essentially a recalibration, by way of insurance. Fed members telegraphed to the market in recent weeks why it made sense to take this step back in the normalization process, after seven months of pause. The only question was to know the intensity and if the door was to be left open for more discounts.
The statement explains that it was decided to lower the rates “in light of the implications of world evolution for the economic landscape, as well as the low inflationary pressure.” He cites, in particular, the “persistence” of uncertainty and states that “it will act if it is appropriate to sustain the expansion, with a strong labor market and inflation.” But the internal consensus is broken. The decision was rejected by Esther George, president of the Kansas Fed, and Eric Rosengren of Boston. They wanted to keep them.
The Fed faced several dilemmas at this meeting. The market demanded the reduction being in historical maximums. Not having done it would not only have been tumultuous, but it would have also reduced credibility for all the signs he had been giving. President Donald Trump pressed in parallel criticizing the latest increases while the other large central banks are immersed in a cycle of rebates. After the decision, he again questioned: “We have failed.”
Powell acts as a precaution. Something similar was done in 1995 and 1998, to avoid the recession. But this time the Fed is also a victim of its own message. After the last increase in December, he said that any decision would depend on the data. Neither the strength of the latest indicators nor the corporate results justified the cut. Nor is there a problem of credit availability, so it is doubted that it can stimulate growth in this way.