Federal Reserve Board Chairman Jerome Powell. (Photo: Bloomberg)
The Federal Reserve cut interest rates for the first time since 2008 on Wednesday, reducing the federal funds rate by 25 basis points to a range between 2% and 2.25%.
The 25 basis-point rate cut was the consensus forecast in the market, though some market observers, including President Donald Trump, were pushing for a 50 basis-point cut.
The decision by the Fed's policymaking Federal Open Market Committee was not unanimous. Two of the voting members, Kansas City Fed President Esther L. George and Boston Fed President Eric S. Rosengren, dissented.
The Fed also announced it will be ending the strategy of drawing down its balance sheet a month earlier than it had previously telegraphed, as of Aug. 1 instead of Sept. 1.
Kathy Jones, fixed income strategist at Schwab, said the earlier end to the balance sheet shrinkage makes sense because the strategy, which is essentially a tightening policy, is at odds with lowering rates, an easing stance.
Market reaction to the Fed rate cut was muted at first because 25 basis points was expected, but an hour after the cut was announced the Dow Jones industrial average was off more than 250 points and the S&P 500 down 32 points — both down about 1% since the previous close. Treasury yields rose slightly.
In announcing its first rate cut since the Great Recession, the Fed noted that even though "job gains have been solid … growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft" and "on a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2% [and] "longer-term inflation expectations are little changed."
The statement also mentioned "implications of global development for the economic outlook" contributing to its decision to reduce rates and "uncertainties" about its economic view.
