The US Federal Reserve FED has cut the short-term overnight rates to a range of 1,75 % to 2 % in its meeting today. The Federal Open Market Committee was not united about the decision, but voted 7- 3 to lower the rates. According to the Fed, the global growth concern and the US China trade talks were the main reasons for the uncertainties in the economic outlook.
– Consistent with its statutory mandate, the Committee seeks to foster maximum employment and 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 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain, the Fed said in its press release.
During the last few days, there has been a financial liquidity shortage in the repo-markets and the Fed has been in the markets to add the liquidity. According to Reuters, the central bank has added 125 billion dollars to the financial system during the couple of days.
One of the reasons why the liquidity was happening in the short-term, is the popular swapping. According to market participants, banks and investors are swapping different maturities in the interest rates markets and using the short-term repo-rates to fund the trades.
The Fed also published its economic outlook update and according to it, the inflation is expected to be 1,5 % during this year and 1,9 % in 2020. The GDP is expected to be 2,2% this year and 2,0% next year.