Coverage: Fed prepares first rate cut in decade
The Federal Reserve is widely expected to announce a cut in interest rates today on deepening concern about U.S. economic growth sustainability.
CNBC’s Sam Meredith reported Dow had jumped 70 points in anticipation of the move:
The U.S. central bank is widely expected to cut interest rates for the first time since the financial crisis more than a decade ago. Market expectations point to a quarter-point rate cut.
The Fed is set to deliver its decision at 2:00 p.m. ET, with Chairman Jerome Powell scheduled to hold a press conference at 2:30 p.m. ET.
CNN’s David Goldman provided an explanation for the expected cut despite a growing economy:
One argument: By cutting rates, the Fed could grow the supply of money, which has been growing too slowly for the past few years. That, more than any tool at the Fed’s disposal, will help keep the economy growing.
“Everyone is focused on interest rates, and that’s the wrong thing to focus on,” said Steve Hanke, an economics professor at Johns Hopkins and a director of the Troubled Currencies Project at the Cato Institute. “It’s all about the growth in the money supply. That’s what drives changes in nominal GDP.”
The number of notes and coins in circulation plus bank accounts is growing at 4.8% per year. Although that’s up from its low of 3.5% per year in October, “a bit more would probably do some good,” Hanke argued.
He argues that the economy is not overheating, which gives the Fed wiggle room to loosen its grip on monetary policy ahead of “international storm clouds” on the horizon — which include uncertainty about trade, a potential no-deal Brexit and slowing growth in China.
Hanke said the US-China trade war and an increase in tariffs, in particular, could damage the global economy, backfiring on the United States.
“The US thinking on this thing is completely wrongheaded,” Hanke said. “We have a president who is a businessman and most businessmen have no clue about international economics.”
Hank Tucker from Forbes warned the rate cut could backfire:
The Federal Reserve is widely expected to cut interest rates by 25 basis points Wednesday afternoon, and conventional economic wisdom suggests that will cause stocks to rise. But conventional wisdom hasn’t reflected reality the last two times the Fed ended a period of tightening with a rate cut.
The most recent example came in September 2007, when the Fed announced a 50 basis point cut from 5.25% to 4.75%. The S&P 500 peaked about three weeks later before diving into the Great Recession—the rate cut would have been a perfect time to get out of the market, not get in. It was a similar story when the Fed cut rates on Jan. 3, 2001 for the first time since 1998. The dot com bubble was just beginning to burst, and 10 more cuts in 2001 couldn’t stop the bleeding. The S&P 500 plummeted 13% that year before an even steeper 23% fall in 2002.