The policy statement released Wednesday signaled a potentially higher bar for rate reductions after the latest move, which will drop the target for the federal-funds rate to a range between 1.5% and 1.75%.
Officials removed language used in June, July and September in which the rate-setting committee said it would “act as appropriate” to sustain the economic expansion. They replaced that phrase with a milder alternative. “The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target rate, the statement said.
Eight of 10 officials voted to lower the Fed’s benchmark rate, charged on overnight loans between banks, by a quarter percentage point. Two Fed officials disapproved of the action, preferring to hold rates steady.
Fed officials have now cut their benchmark three times since July to cushion the economy against a slowdown in business investment amplified by the U.S.-China trade conflict. The Fed raised rates four times last year.
Wednesday’s policy statement made almost no other changes. It noted that household spending had been rising at a strong pace while business investment and exports remained weak. The Commerce Department reported economic output during the third quarter rose at 1.9% annual rate, little changed from a 2% growth rate in the second quarter.
Fed officials didn’t release new projections after Wednesday’s meeting. After cutting rates in September, seven of 17 officials had penciled in one more rate cut this year. The other 10 didn’t forecast any cuts, with five of those signaling they believed last month’s reduction was a mistake.
In the weeks leading up to the meeting, Fed officials were less vocal about their policy plans than they had been in the run-up to two earlier rate cuts.
Weak business survey data in early October led markets to predict the Fed would cut rates, and those expectations hardened after Fed officials didn’t publicly counter them.
Fed officials don’t like to act just because markets expect it. But with investors assigning a greater than 90% probability to a rate cut in futures markets over the past week, failing to deliver could have led to a stock selloff and higher borrowing costs that potentially undercut the benefit of the Fed’s recent cuts.
The bigger questions heading into this week’s two-day meeting were whether and how Fed Chairman Jerome Powell and his colleagues would signal any potential timeout to the central bank’s cuts.
Officials have compared their moves to an insurance policy designed to offset the risk that the U.S.-China trade war and a broader global slowdown leads to a sharp downturn-as opposed to a more aggressive rate-cut campaign due to signs of imminent recession.
The tweaks to Wednesday’s statement illustrate how the central bank is much closer to the line between the mini-easing cycle officials outlined in July and a full-blown rate-cut sequence.
Mr. Powell said last month the uncertain economic outlook made it hard to predict how long rate cuts might last.
“I’d love to articulate a simple, straightforward” rule for suspending rate cuts, he said. “There will come a time, I suspect, when we think we’ve done enough, but there may also come a time when the economy worsens, and we would then have to cut more aggressively.”
Faced with rising risks to growth as the trade war escalated through the summer, Mr. Powell indicated the Fed’s bias was to cut rates if readings on economic activity didn’t improve. But in the last few weeks, officials began laying the groundwork for a subtle but important shift in which they might cut rates instead if those readings worsened.
Officials have highlighted episodes in 1995-96 and 1998 when the Fed cut interest rates three times, avoiding both recession and a full-blown round of rate reductions. “That’s the spirit in which we’re doing this,” Mr. Powell said earlier this month.
Officials have cited three reasons—weakening global growth, rising trade-policy uncertainty and muted inflation—for cutting rates this year. The U.S.-China trade conflict worsened immediately after the Fed made its initial rate cut in July, but the Trump administration earlier this month took steps to put trade talks back on track. Meantime, the global industrial downturn has shown few signs of bottoming out.
U.S. economic data paint a mixed picture. The Commerce Department reported Wednesday that business spending contracted for the second straight quarter, offset by healthy consumer spending and modest improvement in the rate-sensitive housing sector.
Hiring has slowed this year, but to levels that have been strong enough to hold down unemployment. The private sector added an average 119,000 jobs per month during the third quarter, down from 165,000 in the first quarter. The unemployment rate stood at 3.5% in September, a half-century low.
Fed officials will see two more employment reports before their final scheduled meeting of the year on Dec. 10-11, including data set for release Friday from the Labor Department on October’s hiring picture.
Inflation pressures, meanwhile, remain restrained. They have run below the central bank’s 2% target this year, and measures of consumer and businesses’ expectations of future inflation have edged lower in recent months. Fed officials pay close attention to inflation expectations because they can be self-fulfilling. Excluding volatile food and energy prices, prices were up 1.8% from a year earlier in August, according to the Fed’s preferred gauge.
Stocks have rallied in recent weeks on optimism over a potential “phase one” agreement between Washington and Beijing to diffuse trade tensions.
Another positive development for the Fed is that market-determined interest rates, which tumbled in July and August, have firmed up in recent weeks. As a result, long-term interest rates have risen back above short-term interest rates, ending a monthslong inversion of the yield curve, which has often preceded recession by one or two years.
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