As widely expected, the US Federal Reserve on Wednesday cut the interest rates by a quarter percentage point or 0.25 per cent for the first time since 2008 to insulate the economy from a global slowdown and escalating trade tensions. The short-term benchmark rate now stands between 2 per cent and 2.25 per cent.
The US central bank also left the door open for more rate cuts in the coming months. However, Fed chair Jerome Powell, later in the presser, said that the Wednesday's rate cut has been in the pipeline for a while and doesn't necessarily portend a long cycle of rate cuts.
Eight of the 10 Fed officials voted in favour of a rate cut while two dissented from the decision in favor of holding rates steady.
Wall Street appeared unimpressed by the Fed comment as stocks ended in the negative. The Dow Jones Industrial Average closed 333.75 points lower, or 1.2 per cent, at 26,864.27. The S&P 500 slid 1.1 per cent to close at 2,980.38. The Nasdaq Composite fell 1.2 per cent to 8,175.42.
Here's a look at the key highlights from the latest rate-setting meeting of the US Fed -
First rate cut in more than a decade: The US Fed slashed interest rates for the first time since the 2008 financial crisis. Most market participants had projected the Fed to cut rates given global slowdown and muted inflation. “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower" rates, the Federal Open Market Committee (FOMC), led by Jerome Powell, said in a statement following a two-day meeting in Washington.
The rate reduction was the first since December 2008 when the Fed dropped its benchmark effectively to zero as it battled recession and financial crisis. It began raising borrowing costs in December 2015, doing so another eight times, Bloomberg reported.
Fed stops shrinking of balance-sheet: Ending the quantitave tightening (QT), the Fed officialls announced they would end the runoff of their $3.8 trillion asset portfolio on Thursday, two months ahead of schedule.
Following the 2008 economic crisis, the US Fed had decided to follow a policy of quantitative easing (QE). QE is a monetary policy where the central banks purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment. Later, starting in October 2017, central bank started shrinking its balance sheet as it realised too much money had been pumped in the economy and continuing to do so will have severe implcations.
Rate cut decision not due to political pressure: The Fed chairman said that the central bank didn't cut rates due to pressure from the US President Donald Trump. He told reporters, "We also don't conduct monetary policy in order to prove our independence," but to fulfill its goals of maximum employment and price stability.
Earlier this week, Trump had tweeted, “The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!. “The Fed ‘raised’ way too early and way too much.”
Concerns over risks from abroad: While the domestic economy has performed relatively well, the Fed cut amid concern that softness abroad threatens the decade-long US expansion, Bloomberg reported. Trump’s trade war with China is hurting foreign demand. Data released earlier Wednesday showed the pace of quarter-over-quarter growth in the euro area slowed by half in the latest three months to 0.2 per cent.
Earlier this month, Jerome Powell had told lawmakers,"People are very concerned about global growth, and we will feel that over time." He cited examples of businesses holding back on investment. “It has really slowed down here, and one of the reasons is uncertainty around trade and global growth,” The Wall Street Journal reported, quoting Powell as saying.