Commentary

Fed Eases Interest Rates Again, But Consumers May Not See Benefit

For the third time since July, the Federal Reserve yesterday voted to cut its benchmark interest rate by a quarter point in an effort to sustain the long economic expansion that has shown signs of sputtering. Notably, it did not signal that further cuts are in the offing, as it did when announcing the first two reductions.

“For now, chairman Jerome Powell sounded a bullish note about the economy in a news conference after the Fed’s latest policy meeting. Despite some signs of weakness, the Fed expects growth to continue and the job market to remain strong,” writes the AP’s Christopher Rugaber.

"Since spring, manufacturing output has stumbled amid trade tensions and slower global growth, while businesses have cut spending on large equipment. But Powell stressed that the Fed doesn’t see those trends weakening the broader economy. Instead, steady hiring is keeping unemployment very low, boosting consumer confidence, and encouraging more spending,” Rugaber continues.

“Powell’s comments clash with President Donald Trump’s demands that the Fed cut rates even deeper to boost economic growth that ebbed to a 1.9% annual rate in the third quarter, well below the 3% level Trump pledged would flow from a round of tax cuts and other actions nearly two years ago,”  write Reuter’s Howard Schneider and Lindsay Dunsmuir.

But the Fed’s new stance also vouched for both the seeming durability of a U.S. economic expansion that is now the longest on record,” they add.

“Although there may be some trepidation about policy makers delivering another dose of monetary easing to a stock market that is at or near records, history shows that the market tends to extend its gains after three successive interest-rate cuts of a quarter percentage point, according to data from LPL Financial,” writes  Mark DeCambre for Market Watch.

“How good have returns been in those periods in which the Fed has delivered a trio of interest rate cuts of 25 basis points? They have been spectacular in the 6-and-12 month period following those decisions by the rate-setting Federal Open Market Committee,” DeCambre continues.

“LPL data show that the S&P 500 index SPX, +0.33% has been up 10% a half-year later and 20% a year out, gauged by three initial 25 basis point cuts in 1975, 1996, and 1998.”

But some observers point out the news isn’t going to make much of a positive difference in the consumer marketplace.

“Interest rates don’t matter if no one will give you a [home] loan in the first place. And a lot of would-be buyers are in that situation,” writes Ben Casselman for The New York Times.

“After the housing bubble burst over a decade ago, banks and other financial institutions became far more cautious in their lending, partly because of new federal rules meant to discourage risky loans. No one wants a return of the bubble-era ‘liar loans,’ for which borrowers were allowed to state their income without verification. But some argue that the pendulum has swung too far the other way,” he adds.

“Mortgage rates have already been declining for almost a year, noted Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace, with the average 30-year fixed rate now just under 4%, according to Bankrate,” CNBC’s Jessica Dickler writes.

“Mortgage rates this low at the end of an economic cycle are nearly unprecedented, and may be very well keeping the housing market -- and U.S. economy -- afloat,” Ralph McLaughlin, deputy chief economist and executive of research and insights for CoreLogic, tells Dickler.

“And while falling rates aid borrowers, they also nudge down bank savings rates that had just started providing decent yields after years of paltry returns. That's frustrating to seniors and others on fixed incomes,” writes  Paul Davidson for USA Today.

“They’re trying to stimulate the economy but it’s kind of like a tax on savers,” Richard Barrington, senior financial analyst at MoneyRates.com, tells Davidson.

“Barrington also questions whether the Fed’s wary economic outlook and rate cuts will prod some banks to pull back lending, making it tougher for lower-income, higher-risk borrowers to obtain loans or ultimately pushing up rates for those households,” Davidson adds.

Two of the Fed's eight-member rate-setting committee voted against the cut, preferring to leave rates unchanged, writes NPR’s Scott Horsley.

Meanwhile, “the Commerce Department reported Wednesday that economic growth slowed in the third quarter to just 1.9%. The report showed the Fed’s preferred measure of inflation reached 2.2% during the quarter, slightly above the central bank’s 2% target,” Horsely adds.

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