The US Federal Reserve’s open market committee voted overnight to cut the federal funds rate range by a quarter percent, to 2-2¼%.
Debate preceding the decision had been over the size of the cut – ¼% or ½% – rather than whether it would be cut.
The decision wasn’t unanimous – it went 8-2, as Boston bank president Eric Rosengren & Kansas president Esther George voted for no change.
An important additional decision is that the central bank will stop the cutback of its securities holdings this month, August, 2 months earlier than it had previously indicated.
The committee’s statement this morning:
“Information received since the Federal Open Market Committee met in June indicates that the labour market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
“Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food & energy are running below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower the target range for the federal funds rate to 2-2¼%.
“This action supports the committee’s view that sustained expansion of economic activity, strong labour market conditions and inflation near the committee’s symmetric 2% objective are the most likely outcomes, but uncertainties about this outlook remain.
“As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labour market & inflation near its symmetric 2% objective.
“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.
“The committee will conclude the reduction of its aggregate securities holdings in the system open market account in August, 2 months earlier than previously indicated.”
A year ago, the federal funds rate target range was 1.75-2%. The Fed lifted its target range last September to 2-2.25%, and to 2.25-2.5% in December.
Note on the debt rollover
The committee issued an implementation note along with its interest rate decision, affecting some overnight rates, the primary credit rate & its holdings of treasury securities, which it had been reducing.
“Effective 1 August, the committee directs the open market desk to roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve’s holdings of agency debt & agency mortgage-backed securities received during each calendar month.
“Principal payments from agency debt & agency mortgage-backed securities up to $US20 billion/month will be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $US20 billion/month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.”
The US National Debt Clock website shows public debt now at $US22.55 trillion. However, the US Treasury’s own debt clock shows the level holding just above $US22 trillion (in a $US22.022-023 trillion range), which it reached on 11 February.
Attribution: Fed release.