The Federal Reserve Lowers The Fed Funds Rate by 25 bps to a 1.75% to 2.00% Target

The Federal Reserve Lowers The Fed Funds Rate by 25 bps to a 1.75% to 2.00% Target

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The Federal Reserve acted today to lower the target Fed Funds rate by a quarter point.   This follows the July 31 quarter point reduction of the rate.   The Fed Funds rate had stood at a post-crisis high of 2.25% to 2.50% earlier this year, but due to Presidential harassment it now sits at 1.75% to 2.00%.

Jerome Powell’s move was much expected, yet it invariably raises questions.  The Fed’s mandate is to fight inflation and to maintain interest rate stability.   Lowering the rate while inflation is beginning to perk up debases the value of the currency (hurts savers by lowering savings rates) and lowering the rate now also impairs its ability to maintain financial stability in the event of a real crisis.   It is unclear exactly what Powell is afraid of now and what is prompting this action.    Core CPI is strong, the economy is producing at capacity and the stock market is at an all time high.   While the dollar has strengthened against other major currencies, it remains dramatically weaker than it was in 2001 and 2002 and the Fed’s mandate is not to weaken the currency.   Therefore, either Powell is seeing real signs of a slowdown due to the trade war with China and acting preemptively, in which case we should be worried, or he is responding to political pressure in which case a dangerous precedent has happened.

Along with Jerome Powell, 5 other Fed members were on board with the action.   3 Fed governors dissented with one, James Bullard, dissenting because he wanted a full half point cut.  

In the Fed’s statement, it said that the outlook is uncertain and the Fed continues to monitor the situation and will take further action as required.   The outlook is always uncertain and the Fed always monitors the situation.   The prevailing view of Wall Street going into this action was that the Fed would cut again when it concludes it next meeting on October 30.   However, 7 members see the need for another cut and 5 do not, leaving the Fed more divided than ever before and leaving uncertain what action the Fed will take in October.

Jerome Powell himself may not even get to October as Fed Chairman.    There is an anxious man who lives and works at 1600 Pennsylvania Avenue who wants the Fed to act much more quickly and aggressively.    Some believe that his personal business interests require a quicker lowering of rates in order to stay afloat (incidentally, real estate prices in New York are really coming off highs quickly now).   This fellow is capricious and may act now to fire Jerome Powell, and even to replace him with Jim Cramer.   Powell has said that he will not resign his post; a constitutional crisis may be coming.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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