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Three peat? The Fed copied a notebook from the 1990s to prevent a decline

WASHINGTON (Reuters) – In the midst of what turned out to be a golden decade for the US Federal Reserve, central bankers cut interest rates twice in the 1990s to help the US economy continue to grow despite slow investment and weak growth abroad.

FILE PHOTO: The Federal Reserve Avenue Avenue building is pictured in Washington, USA, March 19, 2019. Reuters / Leah Millis

Today's Fed hopes to be fascinated for the third time.

In their last two-day policy meeting this week, Fed officials appear poised to stimulate the economy in a similar fashion with their third consecutive rate cut. This would be in line with the moves of then-Fed Chairman Alan Greenspan in 1995 and 1998 during an era known as "moderation" because of its steady growth, declining unemployment and rate inflation.

There is no clear commitment to further reducing the cost of borrowing from Fed politicians, though the failure of Wednesday's lower rates may risk retaining financial markets that are certain that another reduction will occur. With billions of dollars in bets on futures markets tied to Fed's expected actions, any deviation from the US central bank from the expected exchange rate usually results in dramatic changes in the bond and stock markets.

Wednesday's interest rate cut, which will be the Fed's third this year, will reduce the interest rate on overnight loans to a new range of between 1.5% and 1.75%. Policymakers may emphasize that "the three cuts cumulatively served to balance the risks to the prospects" and are likely to continue the economy on the road, JP Morgan economist Michael Ferrolyi wrote last week.

The Fed is scheduled to announce its latest political decision at 2:00 p.m. EDT on Wednesday (1800 GMT). Fed Chairman Jerome Powell will hold a press conference half an hour later.

Policy makers are unlikely to close the door for further action, but may "declare patience in deciding future political moves," TD Securities analysts wrote last week.


Investors do not have a firm opinion on when the Fed will move again after Wednesday, a signal to Powell and his colleagues that if they achieve the expected cut this week, they will have room to shape market expectations to move forward.

According to the FedWatch tool of the CME Group here, the probability of a rate cut on Wednesday is 94%. But then it's a coin toss to see if there will be any further change for at least a year.

That in itself is a success for Powell. In the beginning of last fall, the Fed was faced with a widening gap between what politicians at the moment believe will continue interest rates rises and investors' expectations, which began to decline, as the global economic slowdown lingered around the widening is trading between USA and China. war.

The Fed, under pressure for lower rates than President Donald Trump, but also watched as US investment and production data weaken, canceled a rate earlier this year.

The financial markets have responded to significantly easier borrowing conditions and lower interest rates on important indicators such as 30-year residential mortgages. The main aspects of the bond market, viewed by some Fed officials as proof of belief or lack thereof in short-term economic growth, appear to be soundly sound.

Some of the continuing problems, such as the trade war with China and the prospect of Britain's unprecedented exit from the European Union, have also been alleviated, at least slightly.

This has helped to narrow the gap between Fed expectations and global market expectations.

May have also helped reduce gaps in the US Central Bank. Even those Fed officials who are most eager to cut rates now believe that another quarter percent reduction should be appropriate for the year. TODAY AND NOW

Today's circumstances share a number of similarities with those encountered by the Fed about a quarter of a century ago.

In July 1995, Fed officials were debating, as now, whether slower-than-expected growth would hurt business investment, spilling over into rental plans and ultimately household spending.

Just as weak growth in Europe is seen as a risk to US companies today, weak prospects for Canada and Japan were a problem afterwards, according to the minutes of the meeting, at which the Fed accepted the first of three rate cuts in six months.

"In the last six weeks, my optimism has subsided," said former Fed chairwoman Janet Yellen, who was president of the San Francisco Federation at the time. Without the Fed's actions, "we could easily have come to a widespread recession."

Fast forward to the present and again economic data were not large.

Recent employment and retail sales reports have also been weak. Reuters surveyed economists expect economic growth to slow in the third quarter to an annual rate of 1.7%, up from 2% in the second quarter. A preliminary estimate of gross domestic product is due to be published on Wednesday before the Fed closes its political session.

As the 1990s went on, two such rounds of "mid-cycle adjustment" were required, about two years apart and each including three cuts of one-quarter percentage point each to maintain the recovery. It was derailed by the bursting of the dot-com bubble, with a recession beginning in March 2001.

The post-financial crisis expansion of 2007-2009 and the recession have already eclipsed the 1990s to turn in the longest period of sustainable growth in US history.

Although the pace was sometimes mild, Powell and his colleagues argued that there was no reason for him not to continue, and promised to act "as appropriate" to try to do so.

In a speech in Denver earlier this month, Powell nodded to both the risks facing the US economy and its continued growth.

In general, "it feels very resilient," he said.

Graphics: Back to the 90s, here

Report by Howard Schneider; Editing by Dan Burns and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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