US Federal Reserve cuts rates for third time this year but signals...

US Federal Reserve cuts rates for third time this year but signals likely pause

SHARE

The US Federal Reserve has cut its benchmark interest rate for the third time this year to try to sustain the economic expansion in the face of global threats.

But it hinted that it will not likely cut again this year.

The Fed’s move reduces the short-term rate it controls – which influences many consumer and business loans – to a range between 1.5% and 1.75%.

A statement the Fed released after its latest policy meeting removed a key phrase that it has used since June to indicate a future rate cut is likely.

This could mean that Fed officials will prefer to leave rates alone while they assess how the US economy fares in the months ahead.

Federal Reserve chairman Jerome Powell

The US economy is in its 11th year of expansion, fuelled by consumer spending and a solid if slightly weakened job market.

By cutting rates, the Fed has tried to counter uncertainties heightened by President Donald Trump’s trade conflicts, a weaker global economy and a decline in US manufacturing.

The third rate cut of the year has partly reversed the four hikes that the Fed made last year in response to a strengthening economy.

That was before rising global risks led the Fed to change course and begin easing credit.

Lower rates are intended to encourage more borrowing and spending.

The Federal Reserve cut its benchmark interest rate for the third time this year

Chairman Jerome Powell has said that the central bank’s rate reductions are intended as a kind of insurance against threats to the economy.

Mr Powell has pointed to similar rate cuts in 1995 and 1998 as precedents; in both those cases, the Fed cut rates three times.

He and most other Fed officials credit their rate cuts with lowering mortgage rates, boosting home sales and generally keeping the economy on track.

The Fed is also weighing the consequences of a decline in expectations for inflation.

Lower inflation expectations can be self-fulfilling. This can pose a problem for the Fed because its preferred inflation gauge has been stuck below its 2% target for most of the past seven years.

In the meantime, Mr Trump, via Twitter, has renewed his attacks on the Fed for not lowering its benchmark rate closer to zero.

The president has contrasted the Fed’s actions unfavourably with central banks in Europe and Japan, which have slashed their rates into negative territory.

Although Mr Trump has argued that this puts the United States at a competitive disadvantage, most economists regard negative rates as a sign of weakness.

Some international tensions have eased since the Fed previously met in mid-September, which might suggest to some that further rate cuts are less necessary.

The US and China reached a temporary trade truce earlier this month and are working on a preliminary agreement that could be signed soon by Mr Trump and President Xi Jinping.

It is not clear, though, how meaningful such an agreement might be, and Mr Trump has not dropped his threat to impose new tariffs on Chinese goods on December 15.

It was hinted that a future rate cut this year is unlikely

Another source of global tension has been Brexit, which has also eased after the European Union agreed to delay the deadline for Britain’s exit from the trade bloc from October 31 to January 31.

That postpones what could have been a hugely disruptive exit, right after the Fed meeting ended, that would likely have damaged the UK and European economies.

The US economy is still growing, and hiring remains steady, although there have been signs of a slowdown in recent data.

Americans cut back on spending at retailers and restaurants last month, a worrisome sign because consumer spending is the leading engine of economic growth.

Still, consumer confidence remains high, and shoppers could easily rebound in the coming months.

Businesses have reduced their spending on industrial machinery and other equipment, mostly because the US-China trade war has made them reluctant to commit to big purchases.

The tariffs and retaliatory tariffs between the US and China, the world’s two largest economies, have also reduced US exports.

Earlier on Wednesday, the government estimated that the economy grew at a tepid but steady 1.9% annual rate during the July-September quarter.

The US job market remains sturdy, with the unemployment rate at just 3.5%, the lowest in 50 years.

Advertisements

NO COMMENTS

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.