Updated at 5:34 p.m. ET
The Federal Reserve is cutting interest rates for the first time in over a decade — a preemptive move aimed at extending the already record-long economic expansion.
The Fed on Wednesday lowered its target for the key federal funds rate by a quarter percentage point. The move should decrease the cost of borrowing, including for credit cards, auto loans and mortgages.
"The outlook for the U.S. economy remains favorable and this action is designed to support that outlook," Fed Chairman Jerome Powell said. He described the rate cut as an insurance policy against potential speed bumps for the economy, including rising trade tensions and a slowdown in global growth.
"There is really no reason why the expansion can't keep going," Powell said. "Inflation is not troublingly high. If you look at the U.S. economy right now, there's no sector that's booming and therefore might bust."
Although the rate cut had been widely telegraphed in advance of Wednesday's announcement, the stock market reacted negatively to Powell's comments. The Dow Jones Industrial Average fell more than 450 points before paring its losses to close down 334 points, or 1.2%. The S&P 500 and the Nasdaq both fell more than 1%.
Investors appeared to be concerned the Fed would pause after this rate cut, although Powell left the door open to additional cuts if economic conditions warrant.
President Trump also complained that the Fed failed to signal more aggressive cuts.
"As usual, Powell let us down," Trump tweeted Wednesday afternoon. "What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle that would keep pace with China, The European Union and other countries around the world."
Powell insists the Fed will be guided by economic signals, not jawboning from the White House.
"We never take into account political considerations," Powell said. "There's no place in our discussions for that. We also don't conduct monetary policy to prove our independence."
The U.S. economy is still growing at a modest pace. And, at 3.7%, unemployment is near a 50-year low. But the central bank is concerned that trade tensions with China and slowing growth in other countries could put the brakes on the economy, just as many Americans are beginning to enjoy the benefits of a slow-moving recovery.
"My view is that the best thing we can do for those people is to sustain the expansion, keep it going," Powell said.
In announcing the rate cut, Fed officials pointed to sluggish business investment and inflation that has been running stubbornly below the central bank's 2% target.
"In light of the implications of global developments for the economic outlook as well as muted inflation pressures," policymakers decided to lower the Fed's key interest rate, the central bank said in a statement. Officials stressed that they would continue to monitor economic conditions and would "act as appropriate to sustain the expansion."
In recent years, the Fed has been focused on raising rates, in an effort to prevent the economy from overheating. Between December 2016 and December 2018, the Fed raised rates eight times.
While interest rates are still low by historical standards, the president frequently complains that the Fed's actions stifled what could have been stronger economic growth.
Trump promised to boost annual GDP growth to 3% or higher by cutting taxes and rolling back regulation. Growth topped 3% in the first three months of 2019, but slowed to an annual rate of just 2.1% in the second quarter. Revised figures from the Commerce Department also show that Trump missed the 3% target in 2018.
Consumer spending — a key driver of the economy — remains strong. But business investment has slowed this year, as the effects of the 2017 tax cut wear off and companies contend with rising uncertainty.
Some Fed officials have acknowledged that they may have acted too quickly in raising interest rates last year. Despite low unemployment, wages have risen only modestly.
"The labor market has improved steadily for 10 years now," Powell told a congressional committee this month. "But just in the last couple of years, it's started to reach communities at the edge of the workforce. And it's just so important for us to continue that process for a couple of years and that's why we're so committed to using our tools to sustain the expansion."
Two members of the Fed's rate-setting committee voted against the rate cut, preferring to leave rates unchanged for now.
AUDIE CORNISH, HOST:
The Federal Reserve cut interest rates today for the first time in over a decade. The move is designed to give a boost to the slowing U.S. economy and extend the decade-long economic expansion. Although the Fed's action was widely telegraphed in advance, the stock market reacted negatively. Major indices fell more than 1%. NPR's Scott Horsley joins us now to explain the Fed action.
Welcome back to the studio.
SCOTT HORSLEY, BYLINE: Good to be with you.
CORNISH: Scott, by most outward appearances, the U.S. economy seems to be in pretty good shape. We've got unemployment near a 50-year low. Employers have been hiring workers at a steady clip. Do I have that right? I mean, why did the Fed need to cut interest rates?
HORSLEY: We have seen some slowdown in economic growth. We learned last week that the economy grew at an annual rate of just 2.1% in the spring. That's down from 3.1% earlier this year. We've also seen a slowdown in manufacturing, partly because of the various trade tensions that are underway. We've also seen slower growth overseas.
With all that, though, Fed Chairman Jerome Powell did not characterize this rate cut as a rescue effort for an ailing economy. Rather, he described the economy as relatively healthy and said the Fed's cutting rates in an effort to keep it that way.
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JEROME POWELL: There really is no reason why the expansion can't keep going. Inflation is not troublingly high. If you look at the U.S. economy right now, there's no sector that's booming and, therefore, might bust.
HORSLEY: Ordinarily, when we have unemployment this low, we might expect to see the Fed raising rates to ward off inflation. And in fact, the Fed was doing that as recently as December. But inflation has stayed really low - in fact, too low as far as the Fed's concerned. So the central bank does have room to lean on the side of goosing the economy.
CORNISH: At the same time, the stock market fell. So what are the markets telling us?
HORSLEY: It's a little puzzling because, you know, the Fed did almost exactly what everyone was predicting it would do. At first, when the news broke, there was actually a little market reaction. It was while Powell was holding his news conference about a half-hour later that we saw a pretty rapid slide in the market.
Investors seemed to be unhappy with Powell's suggestion that the Fed might cut rates this one time and then be done when the market would like to see additional rate cuts. Powell did, however, backtrack a bit and left the door open for additional cuts if economic conditions warrant.
CORNISH: How did the president's comments figure into the Fed's decision? - because Trump has been agitating for a rate cut for months now.
HORSLEY: Right. The central bank insists it's not responding to the president's comments but rather to what's happening in the economy. But Powell also says he and his colleagues aren't going to hesitate to cut interest rates just because that's what the president's asked for, just to kind of show they're willing to stand up to Trump.
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POWELL: We never take into account political considerations. There's no place in our discussions for that. We also don't conduct monetary policy in order to prove our independence.
HORSLEY: The Fed is keeping an eye on what other central banks around the world are doing. The president's been complaining that other central banks are cutting their interest rates and giving a boost to their economies. And in Trump's mind, that comes at the expense of the U.S., so he's wanted the Fed to do the same.
Not everybody on the Fed's rate-setting committee was in agreement about today's rate cut. Two Fed officials voted to leave rates where they were.
CORNISH: In the end, what does this mean for ordinary Americans?
HORSLEY: This will mean slightly lower interest rates on things like car loans and credit cards. Mortgage rates, which tend to follow the bond market, have already fallen. So in a sense, the Fed's just sort of catching up to what's happening in the mortgage market.
Consumer spending does account for more than two-thirds of the U.S. economy, so it's - this is an important leg of the economy that's being propped up here. But, you know, consumer spending was already pretty strong.
The weak spot in recent months has been business investment, so we'll have to see if this rate cut helps to stimulate business spending in a way that prolongs the expansion. Powell is determined to do that because he says there are a lot of Americans who are only now beginning to feel the fruits of economic growth, even though it's been underway for more than a decade.
CORNISH: That's NPR's Scott Horsley.
Scott, thanks for explaining it.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.