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Fed votes to cut interest rates for second time this year

The latest quarter-point rate cut comes amid continued U.S. economic expansion, global trade tensions

Summary

The Fed pointed to weaker inflation pressures and global developments in lowering its target interest rate, and also said business investment and exports had weakened, though consumer spending remains strong.              

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The Federal Reserve on Sept. 18 voted to cut its targeted interest rate 25 percentage points, bringing it down to the 1.75 percent to 2 percent range.

This could benefit credit card borrowers if issuers pass through the decline, as card rates are tied to indexes that move in the same direction as the Fed’s targeted interest rate.

In its policy statement on the rate move, the Fed noted that while consumer spending has been going strong, business spending and exports have weakened.

The Fed said, “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the committee’s view that sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.”

And in a press conference following the rate announcement,  Fed Chairman Jerome Powell noted that the Fed’s most likely scenario is for “continued moderate growth,” though there are risks to that scenario.

See related:  Consumer credit card debt jumped by $10 billion in July, per Fed’s G.19 report

Move anticipated by markets

The markets had been anticipating this move. Powell noted earlier that the Fed would do what it took to sustain the ongoing U.S. expansion, and is aiming to cushion any fallout from President Donald Trump’s trade war with China.

At the Fed’s annual meeting in Jackson Hole, Wyoming, in August, Powell noted that there was more evidence of a global slowdown, particularly in China and Germany.

“Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong and the dissolution of the Italian government,” he said.

President Trump has also been advocating for a rate cut, saying the U.S. economy needs more stimulus, and the strong dollar is hurting exports.

In a Sept. 16 tweet, Trump complained, “The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!”

About Trump’s opinions on monetary policy, Powell said that he is not responding to the comments of public officials, adding that the Fed’s independence from political concerns has served the public well.

See related:  4 credit card moves to make before the year ends

Economy continues to expand 

The U.S. economy itself continues on the path of its longest expansion ever. Employment has continued to grow, with the creation of 130,000 jobs in August.

However, this included 28,000 jobs in the government sector, many of which are temporary jobs tied to the 2020 U.S. census. The unemployment rate stayed steady at 3.7 percent, but the labor participation rate – a measure of the working age population that is employed, or actively looking for work – ticked up to 63.2 percent.

And although inflation is still running below the central bank’s targeted 2 percent rate, it firmed up in July. Based on the personal consumption expenditure price index, inflation moved up to 1.4 percent, from 1.3 percent for June.

Excluding the less stable oil and food prices, inflation remained steady at 1.6 percent in July. However, it seems the manufacturing sector has slowed down, with the Institute for Supply Management’s PMI index, based on a survey of purchasing executives nationwide, showing contraction in the manufacturing sector in August.

According to Powell, while households are in better shape overall than they were prior to the financial crisis, the issue is more with businesses that have taken on a lot of debt. The Fed is monitoring the corporate debt situation, which could potentially amplify any downturn, though it is not likely to create a shock in itself.

Risks could call for more extensive cuts 

Given that economic conditions remain positive, while the Fed is ready to take preemptive action, how might it proceed next?

Powell said that the risks, including global growth and trade developments, could mean that “a more extensive series of rate cuts could be appropriate,” depending on how the situation and data inputs evolve.  The Fed is prepared to take action to sustain economic growth, considering that the positive economic growth is now benefiting communities that were left out previously.

The move for a 0.25 percent rate cut at the current meeting was not unanimous. Three Federal Open Market Committee members voted against the move, with St. Louis Fed President James Bullard voting for a bigger 50 basis point cut, while Kansas City Fed President Esther George and Boston Fed President Eric S. Rosengren voted to hold the rate constant.

And looking at the FOMC members’ projections for the target interest rate, it seems only one participant is looking to a 2.25 to 2.5 percent range as appropriate for 2020. More FOMC members see a lower 1.5 to 1.75 percent as fitting for 2020. The anticipated rate range for 2020 has also been lowered to 1.6 to 2.4 percent, compared to the June projected range of 1.9 to 3.1 percent.

In his daily economic commentary, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted the Fed may hold steady on rates in the months to come.

“We think the incoming wage and inflation data over the next few months will make the FOMC pause before easing again,” he wrote. “They might not be able to act at all if the pass-through from tariffs is rapid and substantial, and wages continue to accelerate.”

See related:  How to manage credit card debt ahead of the next recession

Card APRs are still high, despite rate cuts

Despite the recent interest rate cuts, credit card APRs are still near record highs. The average APR on new credit card offers was 17.61 percent as of Sept. 18.

If you’re carrying a balance on a credit card, be sure to pay it off in full or consider applying for a card that offers an introductory 0 percent APR for balance transfers.

According to the CFPB, the average credit card balance is $5,700. If you make only minimum payments on that amount, at a 17.61 percent APR, it would take you 234 months to pay off your debt. You would pay an extra $7,414.66 in interest charges over that time.

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Published: September 12, 2019

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Credit Card Rate Report Updated: November 6th, 2019
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