Business

U.S. central bank cuts interest rate for 1st time since 2008

The U.S. central bank slashed its benchmark interest rate for the first time in more than a decade on Wednesday, reducing the cost of borrowing in an attempt to stimulate the world's largest economy.

Move trims U.S. rate by quarter point to 2.25%, closer to Bank of Canada's

Federal Reserve Chairman Jerome Powell tried to leave the door open to more interest rate cuts in his comments at a press conference on Wednesday. (Carolyn Kaster/Associated Press)

The U.S. central bank cut its benchmark interest rate for the first time in more than a decade on Wednesday, reducing the cost of borrowing in an attempt to stimulate the economy.

The Federal Reserve cut the upper range of its core lending rate, known as the federal funds rate, to 2.25 per cent. 

That's a cut of 0.25 percentage points from where it was before. It's the first cut since late 2008, when central banks around the world slashed rates to effectively zero to deal with the credit crisis.

While the move was widely expected, it is still significant because it indicates that the central bank sees economic clouds on the horizon that warrant the move to stimulate the world's largest economy.

Compared with when the Fed previously cut rates more than a decade ago, the U.S. economy is doing much better, as consumers are spending, the economy is expanding and the job market is booming.

But the Fed has singled out a number of economic headwinds, notably a trade war being instigated from the White House. Indeed, U.S. President Donald Trump has been the loudest voice calling for a rate cut in order to supercharge the economy.

While many indicators seem to imply strength, the most important one from the Fed's perspective is inflation, which is still stubbornly below the two per cent target.

Toronto-Dominion Bank economist Sri Thanabalasingam said that the move on Wednesday suggests the central bank is leaning toward another cut, but possibly no more.

"The Fed left the door open for further monetary stimulus, and we believe this will come in the form of one more insurance cut in September," Thanabalasingam said.

Stocks sell off

Stock markets reacted to the move by selling off. Investors had anticipated the rate cut, but the tone of the statement and press conference suggested that the central bank may not be planning any more.

All things being equal, rate cuts send stocks higher, as there's an incentive to borrow and invest. But the the Dow Jones Industrial Average, which had been nearly flat before the announcement, was off more than 300 points as Fed chair Jerome Powell started talking.

Powell tried to leave the door open to more cuts in his comments at a press conference on Wednesday, telling reporters, "It's not the beginning of a long series of rate cuts, [but] I didn't say it's just one or anything like that."

The Fed's move brings its rate to within 50 points of the Bank of Canada's rate, which is currently 1.75 per cent.

The central bank's rate filters down into the economy by affecting the rates that retail banks offer to savers and borrowers on things like savings accounts and mortgages. Broadly speaking, the central bank hikes its rate when it wants to slow down inflation. It cuts when it wants to encourage people to borrow and spend to stimulate the economy.

Notably, the decision to cut rates wasn't unanimous within the Fed. Of the 10 board members with a say in the decision, two dissented: Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, who argued for leaving rates unchanged.

Both have raised doubts about a rate cut in the face of the current expansion, an unemployment rate that is near a 50-year-low, and robust household spending.

With files from The Associated Press and Reuters

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