Fed Cuts Interest Rates To Keep Economy Strong, Chairman Powell Says
STEVE INSKEEP, HOST:
The Federal Reserve cut interest rates yesterday, a move that is common in times of economic worry. On the surface, this is not a time of economic worry. By normal measures, the economy is strong and consumer spending is healthy. So why did the Fed act in the way that it did? Let's ask David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, who has specialized in the actions of the Fed.
David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: What exactly did the Fed do?
WESSEL: Well, the Fed cut its key short-term interest rate, which influences other interest rates in the economy, by one-quarter percentage point - second time it's done that this year. And it did it, as you suggested, even though unemployment's at a 50-year low. And the economy is still growing even if it's growing at a slower pace than it had been.
So here's how Fed Chair Jerome Powell explained the move yesterday.
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JEROME POWELL: We took this step to help keep the U.S. economy strong in the face of some notable developments and to provide insurance against ongoing risks.
WESSEL: So basically, the case for cutting interest rates is to reduce the risk that the economy might slow too much, perhaps if the trade war and the slowdown in growth outside the United States leads businesses here to slow hiring and consumer spending then falters as a result.
INSKEEP: OK. So worried about those external factors pushing things down. But did everybody at the Fed agree? - because we should note, this is a decision made by committee, right?
WESSEL: There is clearly unusual disagreement at the Fed. There were 10 people voting at yesterday's meeting. One of them wanted a bigger rate cut. Two didn't want any rate cut at all. And projections by each of the Fed governors and regional bank presidents, including those who don't have a vote this year, show that seven expect another rate cut this year, but 10 don't.
Unfortunately, the Fed doesn't tell us which projection belongs to Chair Powell. And he refused to elaborate at a press conference yesterday. But all this disagreement makes it hard to know whether the Fed will continue to cut rates or is it planning to hold them steady.
INSKEEP: Well, given that he didn't say everything we might like to know, let's listen to some of what Powell did say.
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POWELL: And there will come a time, I suspect, when we think we've done enough. But there may also come a time when the economy worsens. And we would then have to cut more aggressively. We don't know.
INSKEEP: OK. So maybe they'll cut some more, maybe they won't cut some more. Why would they do it if they did it?
WESSEL: Yeah. It's like Jay Powell, the Fed chair, is not an economist. He's a lawyer. But he's starting to talk about the, on the one hand, this, on the other hand, that, kind of economics...
WESSEL: ...Look, basically the Fed is looking at two possible scenarios going forward. On one of them, things - the economy rolls on despite the trade war and despite all the problems in China and Europe. And they don't cut rates again. On the other hand, what Jay Powell said is if the economy turns down, if these risks turn into reality, then they'll cut rates again. And financial markets expect them to do another quarter-point rate cut this year.
INSKEEP: Very briefly, does the Fed still have tools left if there was a real recession? - because an interest rate cut is something they would do in a recession.
WESSEL: Not so much. The key federal funds rate now is below 2%. Usually in a recession, the Fed cuts rates by four or five percentage points. So they have fewer tools than they used to have. They have some unconventional tools. But I think if we have a recession, there's going to be a lot of pressure on Congress to cut taxes, increase spending to save us from a really bad recession.
INSKEEP: David, thanks so much.
WESSEL: You're welcome.
INSKEEP: That's David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
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