Rate is the federal funds target rate until Dec. 15, 2008, and thereafter the upper limit of the federal funds target rate range. | Source: Federal Reserve

Rate is the federal funds target rate until Dec. 15, 2008, and thereafter the upper limit of the federal funds target rate range. | Source: Federal Reserve

The Federal Reserve on Wednesday cut interest rates for the first time in more than a decade, even as the economic expansion in the United States reaches record length, unemployment hovers at historic lows and consumers keep spending.

Uncertainty around global growth and persistently low inflation are behind the expected move, because both pose major threats to the health of the economy at a time when the central bank has limited ammunition to fight off a downturn. It is what’s called an “insurance cut” — one that central bankers are making to keep growth chugging along.

Read more about the Fed’s decision »

Inflation – a key indicator – has been too sluggish.

Inflation +4 % +1.6% Core P.C.E. (excludes food and energy) +3 +2 +1 +1.4% P.C.E. 0 2008-9 global financial crisis –1 ’00 ’05 ’10 ’15 June ’19 +4 % +1.6% Core P.C.E. (excludes food and energy) +3 +2 +1 +1.4% P.C.E. 0 2008-9 global financial crisis –1 ’00 ’05 ’10 ’15 June ’19 +4 % +1.6% Core P.C.E. (excludes food and energy) +3 +2 +1 +1.4% P.C.E. 0 2008-9 global financial crisis –1 ’00 ’05 ’10 ’15 June ’19 Annual change in personal consumption expenditures (P.C.E.) price index | Source: Bureau of Economic Analysis

The Fed’s main jobs are to maintain maximum employment and stable inflation. Officials have long aimed for 2 percent as the sweet spot for price gains. A little inflation is good, because it provides a buffer to keep prices from sinking during times of slow growth. Outright deflation is dangerous because it causes consumers to hoard cash, knowing that goods and services will be cheaper tomorrow.

The problem? Inflation hasn’t hit the goal sustainably since the Fed formally adopted it in 2012.

Stubbornly low inflation has also bumped up the risk that expectations for future inflation will drift lower.

Inflation Expectations +4 % +3 +2 +1 0 –1 ’05 ’10 ’15 July ’19 +4 % +3 +2 +2.0% +1 0 –1 ’05 ’10 ’15 July ’19 +4 % +3 +2 +1 0 –1 ’05 ’10 ’15 July ’19 A measure of expected inflation (on average) over the five-year period that begins five years from today. | Source: Federal Reserve Bank of St. Louis

That could create a self-fulfilling prophecy, because businesses expecting low inflation may set their prices accordingly.

While slow price gains might sound great, they can make it harder for employers to lift wages. Beyond that, the Fed’s policy interest rate incorporates price increases, so weak inflation leaves the Fed with less room to cut rates should the economy slump.

Policymakers want to get ahead of a global economic slowdown.

Concerns over the trajectory of the global economy have been building. The trade war, a slowdown in China and a weakening that spans many advanced economies might all be adding to the rising anxiety.

Global Economic Policy Uncertainty Index Greater uncertainty 350 100 200 300 50 150 250 ’00 Sept. 11, 2001 terrorist attacks U.S. invasion of Iraq ’05 2008-9 global financial crisis ’10 Eurozone crises, U.S. debt-ceiling crisis, China leadership transition European immigration crisis ’15 Brexit referendum Trump elected U.S. president June ’19 Political turmoil in Brazil, France and South Korea; U.S. trade wars 350 Political turmoil in Brazil, France and South Korea; U.S. trade wars 300 Trump elected U.S. president Greater uncertainty 250 Brexit referendum Eurozone crises, U.S. debt-ceiling crisis, China leadership transition 2008-9 global financial crisis 200 Sept. 11, 2001 terrorist attacks European immigration crisis U.S. invasion of Iraq 150 100 50 ’00 ’05 ’10 ’15 June ’19 350 Political turmoil in Brazil, France and South Korea; U.S. trade wars 300 Trump elected U.S. president Greater uncertainty 250 Brexit referendum Eurozone crises, U.S. debt-ceiling crisis, China leadership transition 2008-9 global financial crisis Sept. 11, 2001 terrorist attacks U.S. invasion of Iraq 200 European immigration crisis 150 100 50 ’00 ’05 ’10 ’15 June ’19 Greater uncertainty 350 100 200 300 50 150 250 ’00 Sept. 11, 2001 terrorist attacks U.S. invasion of Iraq ’05 2008-9 global financial crisis ’10 Eurozone crises, U.S. debt-ceiling crisis, China leadership transition European immigration crisis ’15 Brexit referendum Trump elected U.S. president June ’19 Political turmoil in Brazil, France and South Korea; U.S. trade wars A G.D.P.-weighted average of national indexes of the frequency of newspaper articles in each country that discuss economic policy uncertainty. | Source: Scott Baker (Northwestern Univ.), Nick Bloom (Stanford Univ.) and Steven Davis (Univ. of Chicago)

At a time when inflation is already low and interest rates do not have much room to fall, policymakers want to get ahead of any shocks that could disturb American growth.

Here’s what a rate cut could mean for you »

Manufacturing is one area where growing concerns could be bleeding into real economic activity. Indexes that track production across many advanced economies are either slowing or contracting.

Purchasing managers’ indexes Economic conditions in: June ’19 June ’18 Contracting No change Expanding 40 45 50 55 60 Israel Vietnam Greece India Sweden Norway New Zealand Brazil Netherlands Indonesia U.S.* France* Ireland Japan* Singapore World Australia China Canada Mexico Russia Italy Poland U.K. Spain Turkey Switzerland South Korea Austria* Euro Zone* Czech Rep. Taiwan Denmark Germany* 40 45 50 55 60 Economic conditions in: June ’19 June ’18 Contracting No change Expanding 40 45 50 55 60 Israel Vietnam Greece India Sweden Norway New Zealand Brazil Netherlands Indonesia U.S.* France* Ireland Japan* Singapore World Australia China Canada Mexico Russia Italy Poland U.K. Spain Turkey Switzerland South Korea Austria* Euro Zone* Czech Rep. Taiwan Denmark Germany* 40 45 50 55 60 June ’18 Economic conditions in: June ’19 Contracting No change Expanding 40 45 50 55 60 Israel Vietnam Greece India Sweden Norway New Zealand Brazil Netherlands Indonesia United States* France* Ireland Japan* Singapore World Australia China Canada Mexico Russia Italy Poland United Kingdom Spain Turkey Switzerland South Korea Austria* Euro Zone* Czech Republic Taiwan Denmark Germany* 40 45 50 55 60 A measure of manufacturing including output, orders, stocks and other factors. *Data through July, all others through June. | Source: IHS Markit, via FactSet

While services make up a growing share of G.D.P., factory progress is a good economic warning signal: It slows down earlier than other industries when activity weakens. Fed officials have been watching the sector apprehensively.

Unemployment is often low right up until a recession, so it is a poor guide for Fed policymakers.

While inflation, global uncertainty and hints of slowing economic activity helped push the Fed to a cut, there are good reasons that officials are not yet predicting an all-out rate-cutting cycle that returns the policy setting to near-zero. Consumers are still spending, the labor market is growing and output remains strong.

But all of those data points respond to economic weakening with a delay.

Unemployment 20 % Recessions Underemployment 15 (Includes unemployed and people interested in working, but not actively applying*) 10 June: 7.2% 5 3.7% Unemployment rate 0 1980 1990 2000 2010 2019 20 % Recessions Underemployment 15 (Includes unemployed and people interested in working, but not actively applying*) 10 June: 7.2% 5 3.7% Unemployment rate 0 1980 1990 2000 2010 2019 20 % Recessions Underemployment 15 (Includes unemployed and people interested in working, but not actively applying*) 10 June: 7.2% 5 3.7% Unemployment rate 0 1980 1985 1990 1995 2000 2005 2010 2015 2019 20 % Recessions Underemployment 15 (Includes unemployed and people interested in working, but not actively applying*) 10 June: 7.2% 5 3.7% Unemployment rate 0 1980 1985 1990 1995 2000 2005 2010 2015 2019 *Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percentage of the civilian labor force plus all persons marginally attached to the labor force. | Source: Bureau of Labor Statistics

The unemployment rate does not turn decisively higher until just before, and sometimes a few months after, the beginning of a recession. As a result, central bankers seem to think this is the time to get moving — waiting and watching can come later, once the economy has a little bit of added juice to fall back on.