Fed Cuts the Fed Funds Rate

By at 30 October, 2019, 7:55 pm

by Raymond J. Keating-

The Federal Open Market Committee (FOMC) released its latest statement on the economy and monetary policy on October 30th. And my initial reaction was: Yawn.

The Fed announced that it would cut the federal funds by a quarter point, from a range of 1.75 percent to 2 percent, to 1.5 percent to 1.75 percent.

As much as seemingly countless market investors hang on every Fed action and each utterance from Fed governors, this rate cut will have no substantive impact on the economy. It’s merely another signal that the Fed’s decade-plus policy of loose money will persist, for the most part.

Although, on a positive note, it is worth noting that at least through the end of September, the Fed continued with its gradual – indeed, very gentle – reining in of the monetary base (i.e., currency plus bank reserves).

As for the economy, according to the Fed, it’s growing at a “moderate” pace, with job gains solid, “on average.” Meanwhile, the Fed basically confirmed what we saw in the latest GDP report, noting that “business fixed investment and exports remain weak.”

In terms of the current overall policy picture, the Fed is not equipped to do anything about the key issues weighing on business investment and trade – such as costly trade policies and the lack of certainty in terms of where trade is going in the Trump administration.

The Fed best aids the economy by maintaining price stability, and despite Fed policy venturing into uncharted territory for the past decade-plus, we are experiencing price stability. Perhaps when it comes to monetary policy, it’s better to be lucky than wise.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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