The US Federal Reserve cut interest rates July 31 for the first time since the 2008 financial crisis in an effort to keep the US’s long-running economic expansion on course.
It was in many ways an unusual move given the strong labour market, but possible in the absence of significant inflationary pressures. The US Labour Department reported inflation at 1.6% for June, while the employment rate was just 3.8%.
June data for non-defence capital goods excluding aircraft was also unexpectedly strong, rising 1.9% year on year, but the Fed’s move is nonetheless defensive, indicating concerns over the domestic US economy’s resilience in the face of a global slowdown in trade.
Real GDP growth for the second quarter was 2.1% year on year, down from 3.1% in the first quarter, according to the advance estimate published July 31 by the US Bureau of Economic Analysis. Housing starts dropped 3.9% in the first half of the year and home-related retails sales were also negative, despite otherwise robust consumer spending.
Illustrating the difference between the domestic economy and the external trade environment, government spending was up 5.0%, but exports of goods and services fell by the same amount.
The Federal Reserve did not signal that the reduction was the start of a longer-term cycle of rate cutting. However, given flat imports and an overall picture of slowing growth, the need to cut interest rates is a negative indicator when it comes…