With the U.S. and global economies dealing with a period of turbulence, the Federal Reserve on Wednesday shaved 25 basis points off its benchmark interest rate for the second time in two months.
The cut comes despite a solid labor market and economic activity that, according to the Fed, has been rising at a “moderate” rate. Still, manufacturing has shown considerable weakness, with business fixed investment and exports showing vulnerability amidst the ongoing U.S.-China trade war and other international stressors, such as the United Kingdom’s messy divorce with the European Union.
“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the [Federal Reserve’s Federal Open Market] Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent,” the Fed announced. Seven of the Fed’s 10 regional presidents voted for the rate cut.
Despite the decisive (and predicted) action by the Fed, the cut did little to alleviate market uncertainties, said Mike Fratantoni, chief economist and senior vice president of research and industry technology for the Mortgage Bankers Association.
“Although the financial markets fully anticipated today’s Federal Reserve decision to lower their target for the Fed Funds rate, the level of uncertainty in respect to the global and domestic economy and future monetary policy has been quite high. This is why there’s been a wild swing in mortgage rates over the past month.
“Today’s news does little to reduce uncertainty. The trade war with China, and now conflict in the Middle East, certainly add to the overall uneasiness. While it is not surprising that FOMC voters cannot agree on the outlook for monetary policy, as indicated by the three dissenting votes today, the disagreement itself also adds to the uncertainty.”
Looking ahead, Fratantoni said, the MBA expects the recent home-refinance wave, spurred by the last month’s drop in mortgage rates, will tail off toward the end of 2019. The home-purchase market should continue to benefit from significantly lower mortgage rates compared to last year and, coupled with a continually strong job market, these factors should continue to support homebuyer demand, he added.
As Fratantoni said, the divisive nature of the vote is noteworthy. The trio of dissents represents the most in a Fed vote since December 2014. Two regional presidents indicated a preference to keep the federal funds rate unchanged, while the third, James Bullard of St. Louis, pushed for an even larger rate cut of 50 basis points.
At a news conference after the committee meeting, Federal Reserve chairman Jerome Powell said that the group “took this step to keep the economy strong.” He added that although the outlook for the national economy remains healthy, it is “a time of difficult judgments” and rates could see another cut this year if the economy shows further weakness. Fannie Mae, among others, projects another rate cut in December.
The cut already has one high-profile detractor in President Donald Trump, who has aggressively berated the Fed on Twitter for not cutting rates already. Trump lamented Wednesday’s action as not enough of a cut, haranguing Powell and the Fed in a tweet for having “no ‘guts,’ no sense, [and] no vision.” He also added a further jab at Powell — who Trump nominated to the chairman’s post in 2017 — calling him a “terrible communicator.”