Wednesday 21 August 2019

Stocks tumble as US Fed cuts interest rates

The central bank reduced its benchmark rate by a quarter-point to a range of 2pc to 2.25pc. (stock picture)
The central bank reduced its benchmark rate by a quarter-point to a range of 2pc to 2.25pc. (stock picture)

Martin Crutsinger

The US Federal Reserve cut its key interest rate for the first time in a decade to try to counter threats ranging from uncertainties caused by President Donald Trump's trade wars to chronically low inflation and a dim global outlook.

The Fed also repeated a pledge to "act as appropriate to sustain the expansion" which the financial markets have interpreted as a signal of possible future rate cuts.

Stocks tumbled soon after the early afternoon statement.

The Dow Jones Industrial Average, which had been nearly flat before the announcement, was off more than 300 points about an hour later, while the reaction in the bond market was more muted.

The central bank reduced its benchmark rate by a quarter-point to a range of 2pc to 2.25pc.

It's the first cut since December 2008 during the depths of the crash, when the Fed slashed its rate to a record near zero and kept it there until 2015. The economy is far healthier despite risks to the longest expansion on record.

In addition, the Fed also said it would stop shrinking its enormous bond portfolio in August, two months earlier than planned.

This step is intended to avoid putting upward pressure on long-term borrowing rates.

The Fed had aggressively bought Treasury and mortgage bonds after the financial crisis to drive down long-term rates but had been gradually shrinking its balance sheet as the economy strengthened.

The Fed's action was approved by an 8-2 vote, and two votes against hinting that chairman Jerome Powell may face opposition if he seeks further rate cuts this year. Mr Trump has blamed the Fed's four rate hikes in 2018 as a key reason why the US economy is slowing.

Many market traders foresee two or even three cuts this year as the Fed tries to counter global threats that risk spreading to the United States.

Irish Independent

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