The Federal Reserve cut its benchmark rate by a quarter-point to a range of 2% - 2.25% for the first time two weeks ago since 2008. Three questions stand: does this mean that we are in trouble, what are the implications and motivations behind this move, and who does this affect?
By lowering the federal funds rate by a quarter percentage point, the Fed is attempting to postpone a looming recession offset by trade tensions, low inflation rates, and a slowing global economy - essentially, an "insurance cut" to make sure that growth continues at its current levels. While the U.S. economy has continued to expand, inflation rates, one of the Fed's key goals, have yet to reach the 2% target. A certain level of price increases is good so that prices do not fall too much during times of slowed growth.
Although Jerome H. Powell, chair of the Federal Reserve, issued a public statement that he does not see why the US economy cannot continue expanding, the stock market reacted negatively to the interest rate cut as investors were concerned that this could be the Fed's last rate cut for a while. Powell commented that this was simply a "mid-cycle adjustment" and that the central bank does not plan to continue the cycle of interest rate cuts which is in fact the message they were looking for. Traders have been hoping that continued rate cuts can help boost the economy and stock prices as they would make borrowing easier and more accessible.
As a result, stocks fell and bond yields rose. Bond yields move inversely to interest rates and during periods of fear, many investors sell risky assets, such as stocks, in favor of safer ones, such as bonds, in what is described as "The Fear Trade". While consumer spending is key driver and indicator of economic conditions, has remained strong, business investment has slowed as benefits from the 2017 corporate tax cuts have begun to wear off. Investor disappointment may have caused them to go into selling mode. President Donald Trump has repeatedly criticized the Fed and has called for Mr. Powell to adopt more aggressive rate cuts. The Fed has stated that it is not swayed by administrative pressure nor does it discuss politics during its meetings. A looming trade war with China, however, has Fed officials concerned that businesses could begin to postpose investments due to Trump's policies. The Fed is planning to carefully monitor market responses to such events and respond accordingly.