Fed cuts rates again; slow exports could impact Virginia

The Federal Reserve on Wednesday cut interest rates for the second time this year by a quarter-percentage point, lowering the short-term benchmark between 1.75% and 2%, effective Thursday.

A decision in July to cut rates a quarter-point was the first reduction since December 2008.

In a statement released Wednesday, the Fed continued to emphasize that, unlike last decade’s Great Recession, today’s labor market is strong and economic activity has continued to rise moderately. Similarly, job growth has remained moderate, and the unemployment rate is low. Global economic factors — particularly trade tensions with China and oil market volatility — are the main reasons behind the cuts, Fed Chair Jerome H. Powell said.

“There are three things going on,” Vinod Agarwal, deputy director of Old Dominion University’s Dragas Center for Economic Analysis and Policy, said following the announcement. “One is the uncertainty in the world economy,” created by the president’s on-and-off-again threats of tariffs on Chinese goods. “Businesses don’t know what to do.” The recent attacks on Saudi Arabian oil facilities and an overall slowdown of the world economy also contribute to investor worries, Agarwal added. 

Powell spoke Wednesday about the slowdown in business investment and exports this summer, which he attributed to trade uncertainty, and said he expects these numbers to remain soft.

If the U.S. economy stays strong amid a global slowdown, the dollar will grow in value and could further contribute to declines in U.S. exports to other countries, Agarwal said. Prolonged weak numbers in exports would negatively affect the Port of Virginia and, consequently, the commonwealth, he added. 

However, “Hampton Roads’ economy should [continue to] do well,” Agarwal said. “Defense spending is continuing to increase.”

The main question for investors is whether the Fed will lower rates again before the end of the calendar year. The Fed’s statement Wednesday left open the possibility for additional cuts, but the Federal Open Market Committee’s vote was split. Powell and six other members carried the quarter-point cut, while others wanted to remain at status quo. One member supported a half-point decrease.

In the short term, lower rates will benefit consumers with credit cards or small loans, Agarwal said, but the overall impact of the Fed announcement remains small.

Instead, Agarwal said he is watching the federal deficit for signs of a downward financial turn. The U.S. budget deficit is expected to exceed $1 trillion for the entire fiscal year, which ends Sept. 30. In August, Congress approved an additional $320 billion in spending over the next two years and suspended the debt ceiling through mid-2021.

“There’s no such thing as a free lunch,” Agarwal said. “If you’re getting something today, you’ll have to pay for it tomorrow.”