Washington — A divided US Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday and announced it would restart limited purchases of Treasury securities after money markets showed signs that liquidity was becoming scarce, a condition the US central bank has pledged to avoid.
The rate cut, which included a nod to the data limits the Fed faces during the current federal government shutdown, drew dissents from two policymakers, with governor Stephen Miran again calling for a deeper reduction in borrowing costs and Kansas City Fed president Jeffrey Schmid favouring no cut at all given ongoing inflation.
The balance sheet decision will keep the total amount of the central bank’s holdings steady on a month-to-month basis from December 1, but shift its portfolio by reinvesting the proceeds of maturing mortgage-backed securities into Treasury bills.
The 10-2 decision to lower the policy rate to 3.75%-4.00% was expected by investors as a way for the Fed to temper any further decline in a job market policymakers worry may be losing steam.
US stock indices held small gains after the release of the policy statement, while Treasury yields, which move inversely to prices, rose.
In comments after the meeting, Fed chair Jerome Powell said: “In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December.
“A further reduction in the policy rate at the December meeting is not a foregone conclusion.”
Gold prices pared gains after Powell’s comments. Spot gold was up 0.3% at $3,964.39 per ounce at 7.10pm GMT, after rising as much as 2% earlier in the session.
US gold futures for December delivery settled 0.4% higher at $4,000.7 per ounce.
Fed policymakers acknowledged the limits in their decision-making process posed by the government shutdown, dating their view of the unemployment rate to August — the month of the last official jobs release — while noting that “available indicators suggest” the economy continued growing at a moderate pace.
Inflation has not risen as strongly as initially expected on the back of the Trump administration’s new import taxes, but nevertheless has climbed from about 2.3% in April to about 2.7% in August, according to the last official estimate released for the personal consumption expenditures (PCE) price index before the shutdown. The Fed uses the PCE to set its 2% inflation target, and in projections issued in September policymakers expected it to rise to 3% by year’s end.
They expect that increase in prices to ease over time, while concern about the strength of the job market has climbed.
“Downside risks to employment rose in recent months,” the Fed said in its new policy statement.
The dissents by Miran and Schmid marked just the third time since 1990 that policymakers have dissented both in favour of easier and tighter monetary policy at the same meeting.
Reuters
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