In a divided decision, Federal Reserve officials lowered the bank's benchmark interest rate by 25 basis points on Sept. 18, easing policy for the second time this year to stave off worries about a potential slowdown.
The federal funds rate will move down to a new target range of 1.75% to 2%, according to the post-meeting statement from the Federal Open Market Committee.
Three officials dissented on the decision, with one favoring a more aggressive cut and two preferring to keep rates unchanged. Similar divisions were apparent in the new quarterly projections from Fed officials, which showed a slim majority of officials leaning against cutting interest rates again this year, though many investors expect the Fed to do so.
Fed Chairman Jerome Powell avoided offering specific guidance during his post-meeting news conference, saying Fed policy is "not on a preset course" and that officials will monitor incoming data to gauge future changes to their benchmark rate.
Right now, Fed officials believe the current situation "should be addressed with moderate adjustments" to their benchmark rate, Powell said.
"We are watching carefully to see whether that is the case," he added. "If, in fact, the economy weakens more, then we're prepared to be aggressive, and we'll do so if [that approach] turns out to be appropriate."
The rate cut from the Fed was widely expected, since the risks to the economy the Fed flagged when it first lowered rates on July 31 have not yet abated. Powell's comments suggest he is "clearly embracing the notion" that the FOMC needs to get ahead of possible risks to the economy before they emerge, Richard Moody, chief economist at Regions Financial Corp., wrote in a research note.
"While the bar may be a bit higher, the FOMC isn't quite done cutting the funds rate," Moody added.
The move lower comes as growth in Europe and China continues to decelerate and a trade war between the U.S. and China remains a major source of uncertainty for businesses. The Fed highlighted those concerns, saying business fixed investment and exports have "weakened."
Still, the Fed statement noted that household spending "has been rising at a strong pace," a key development given that consumers make up approximately 70% of the U.S. economy.
Boston Fed President Eric Rosengren and Kansas City Fed President Esther George voted against the rate cut, arguing that rates should remain at current levels. They had also dissented when the Fed lowered rates in July.
St. Louis Fed President James Bullard dissented on the latest Fed decision as well, though he did so from a dovish perspective. Bullard, who favored a 50-basis-point rate cut, has noted that markets have a more pessimistic outlook on the U.S. economy than the central bank and that inflation has continually registered below the Fed's 2% goal.
The Fed's preferred inflation gauge, the personal consumption expenditures, or PCE, index excluding food and energy, rose by 1.6% year over year in July. The median projection from Fed officials suggests they view core PCE ending the year at 1.8% and returning to 2% in 2021.
Bullard was likely among the seven Fed officials whose projections showed they would favor cutting rates once more this year. But the bloc was not large enough to shift the median view at the Fed toward further easing. In all, 10 Fed officials said they preferred keeping rates unchanged after the Sept. 18 rate cut or suggested they opposed the rate cut altogether.
Powell: Negative interest rates unlikely
Talk of a possible recession, along with the Fed's limited room to cut short-term interest rates, has prompted speculation that the Fed may some day follow its counterparts in Europe and Japan into negative-interest-rate territory.
But Powell played down that possibility, saying the Fed evaluated using negative interest rates during the financial crisis but opted against it. Instead, the Fed decided to use "aggressive forward guidance" that it would keep rates near zero for a long time, and it bought up large amounts of Treasurys and mortgage-backed securities. The Fed's asset purchases led to a balance sheet that peaked at $4.5 trillion.
According to Powell, if the Fed were to cut rates to near-zero levels again sometime in the future — an action he said he does not expect — the Fed would look at using those two unconventional policy tools instead of negative rates. The Fed chief added that the Fed's unconventional tools "worked fairly well."
Fed responds to volatility in money markets
The Fed also announced some technical tweaks aimed at addressing recent volatility in short-term money markets. The Fed's benchmark rate spiked as a result of that tumult, even breaching the top of the Fed's 25-basis-point target. Powell said the jump was due in large part to temporary factors that drew cash out of the private sector, including a corporate tax payment deadline and a larger-than-usual issuance of Treasury securities. While the Fed was aware those temporary concerns would emerge mid-month, their effect ended up being larger than expected, Powell said.
To help nudge its benchmark rate down, the Fed lowered a separate interest rate it pays to banks for excess reserves they hold at the Fed. The interest on excess reserves rate will drop by 30 basis points and will now be at 1.80%. The Fed also brought down a related rate for a Fed overnight repurchase facility to 1.70%, five basis points below the bottom of the Fed's target range.
The New York Fed, with the FOMC's prior approval, conducted open market operations to temporarily inject liquidity into the banking system on Sept. 17 and Sept. 18, and it announced a third round for Sept. 19.
Powell said that while the repo issues are "important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy."
"These temporary operations were effective in relieving funding pressures, and we expect the federal funds rate to move back into the target range," he said.
