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Fed Cuts Rate for Third Time This Year, Signals Pause

The Federal Reserve cut interest rates for the third time this year and signaled it would refrain from further reductions unless the economy slowed sharply.

“The current stance of [interest rate] policy is likely to remain appropriate” for as long as economic activity follows the central bank’s outlook for moderate growth, Fed Chairman Jerome Powell said at a press conference Wednesday after the conclusion of a two-day meeting.

The Fed’s policy statement released Wednesday also signaled a higher bar for rate reductions after the latest move, which will drop the central bank’s benchmark federal-funds rate by a quarter percentage point to a range between 1.5% and 1.75%.

Fed officials removed language used in June, July and September in which the central bank’s rate-setting committee said it would “act as appropriate” to sustain the economic expansion. Instead, they said the group would “monitor the implications of incoming information…as it assesses the appropriate path” of rates.

The committee voted 8-2 to lower the benchmark rate. The two dissenters preferred to hold rates steady.

Fed officials have now cut rates three times since July to cushion the economy against a slowdown in business investment amplified by the U.S.-China trade conflict. In contrast, they 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 rose during the third quarter at 1.9% annual rate, little changed from a 2% growth rate in the second quarter and at the pace Fed officials expect to see over the long run.

“I think it’s consistent with an economy that’s just moving back towards trend,” said Michael Feroli, an economist at JPMorgan Chase & Co.

Growth was supported by consumer and government spending and residential investment, which helped offset a second consecutive quarterly fall in business spending. Investment in structures dropped sharply, particularly those related to the petroleum and natural gas industries.

Equipment spending on aircraft also fell amid the continuing grounding of Boeing Co.’s 737 MAX jetliner and probes into the causes of two deadly crashes involving the Boeing plane, a Lion Air jet in October 2018 and an Ethiopian Airlines MAX in March.

In the weeks leading up to the Fed meeting, 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 central bank 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 of 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 would 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 a timeout on further rate cuts.

Fed officials have compared the recent rate reductions to an insurance policy designed to offset the risk that the U.S.-China trade war and a broader global slowdown lead to a sharp downturn. They distinguished that from an aggressive series of cuts aimed at halting a slide into recession.

Mr. Powell indicated that Fed officials were now comfortable entering a wait-and-see phase. He said the Fed would cut rates again if there was a “material reassessment” of the bank’s relatively favorable economic outlook.

Mr. Powell also said the Fed believed rate reductions this year “are providing and will continue to provide meaningful support to the economy.”

The officials have highlighted the accumulation of rate cuts during past periods in which they were ready to signal a higher bar to continue with reductions, including in 1996 and 1998.

This approach didn’t always work out. In October 2007 and June 2008, Fed officials tried to deliver similar messages, only for a credit crisis to deepen, forcing extensive rate cuts.

The officials have cited three reasons for cutting rates this year: weakening global growth, rising trade-policy uncertainty and muted inflation.

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.

Mr. Powell noted the job market remains robust. Hiring has slowed this year but to a pace strong enough to push unemployment down to a half-century low of 3.5% in September.

Fed officials will see two more employment reports before their final scheduled meeting of the year on Dec. 10-11, including the October data to be released Friday.

Inflation pressures, meanwhile, remain restrained. They have run below the central bank’s 2% target this year, and measures of consumer and business 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. That ended a so-called inversion of the yield curve, a development that has often preceded recession by one or two years.
Source: Dow Jones

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