WASHINGTON, D.C. — The Federal Reserve on Wednesday cut interest rates for the first time since the Great Recession in 2008, a risky move that clashes with its historical practice of taking such a step only when the economy is in real trouble.
The small, quarter-point reduction in its key rate is meant to be preventive medicine in the face of global economic uncertainties, such as the U.S. trade conflict with China and Britain’s messy exit from the European Union.
In announcing its decision after a two-day meeting, the Fed highlighted elements of a solidly growing economy but stated that it was acting “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”
The Fed statement signaled that the central bank was prepared to cut rates further, reiterating that it “will act as appropriate to sustain the expansion.”
That strategy is a departure from the past when the central bank typically acted only after seeing actual evidence of an impending downturn.
The economic effect of lowering the Fed’s benchmark rate to 2.25% from 2.5% will probably be muted.
Mortgage rates and stock prices already have factored in a rate cut; most corporations haven’t had trouble getting credit; and tweaking borrowing costs won’t boost car sales, which have peaked after years of strong pent-up demand.
But the danger is that interest rates are already low, and dropping them further not only nicks the Fed’s firepower when a real downturn comes but also could add fuel to stocks and other assets that are at very high levels.
“That is clearly the risk: It fans some bubbles,” said Ryan Sweet, an economist at Moody’s Analytics.
Even after Wednesday’s widely expected policy move, the Fed will almost certainly face pressure to lower rates further.
Over the past year President Trump has been hammering the central bank and his appointed chairman, Jerome H. Powell, out of fear that a slowdown could hurt his chances of winning reelection next year.
Trump tweeted this week ahead of the policymakers’ meeting that “a small rate cut is not enough.”
Powell and other Fed officials have pushed back on criticism that they would bow to the president’s demands, insisting that their policy decisions are independent from political influence and will be based on economic data.
But some analysts were unconvinced.
“The Fed’s decision today is like in the days when doctors bled their patients to heal them,” said Chris Rupkey, managing director at MUFG Bank in New York. “Fed officials made a very unwise decision today and buckled to the president’s demands by manufacturing reasons to cut interest rates despite a strong economy with no recession signs apparent anywhere out on the horizon.”
Two of the Fed’s 10 committee members voted against the rate cut, saying they preferred to keep it at the current level. At the Fed’s last policy meeting June 18-19, one member dissented. Discussions on further rate actions could create more division among Fed officials, making for more difficult decision-making.
