The Federal Reserve's Federal Open Market Committee (FOMC) reduced the federal funds rate by 25 basis points, or one-quarter of a percentage point a little earlier this afternoon, going from 2.25%-2.50% to 2.00%-2.25%. It was the first reduction in the funds rate in more than a decade.
The central bank seemingly lowered the benchmark rate by the quarter of a percentage point, in a move that had been expected as an insurance policy against what could possibly go wrong with the economy down the road. It was not a reflection of the current business conditions, which remain fairly strong, for the most part.
In approving a lowering of the federal funds target, the FOMC cited “implications of global developments for the economic outlook as well as muted inflation pressures”. The FOMC called the rate of growth moderate and the labor market strong. It should be noted that most expect an affirmation of this strong labor trend this coming Friday when the government issues its July payroll numbers.
The Fed also left open the door for future rate cuts, saying it will “act as appropriate to sustain the expansion,” as it continues to evaluate incoming economic reports. For now, and in addition to the solid labor market and consumer spending data, the FOMC also acknowledged that business investment "has been soft."
All in all, there were few surprises in this Fed action and accompanying FOMC statement, and that apparently has not sat well with investors, who have done some selling in the wake of the Federal Reserve’s decision and statement. As we go out with this report, in fact, the Dow Jones Industrial Average, up nominally before the rate move, has fallen back by 250 points.
– Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
