Federal Reserve cuts rates for a thrid time but signals it will now pause
WASHINGTON: The Federal Reserve cut short-term interest rates Wednesday for a third time this year to try to support the economy. But it signaled that it plans no further cuts unless it sees clear evidence that the economic outlook has worsened.
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.
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.
“Monetary policy is in a good place,” Powell said. “If developments emerge that cause a material reassessment of our outlook we would respond accordingly. Policy is not on a pre-set course.”
Some of the global and trade threats that have been bedeviling the economy have receded, Powell said, thereby reducing the need for future rate cuts. The U.S. and China have reached a tentative truce that has cooled their trade war. And the European Union has agreed to extend the deadline for the United Kingdom’s exit from Oct. 31 to Jan. 31, lowering the likelihood of an economically disorderly “no deal” Brexit.
“On both, the risks appear to have subsided,” he said. “That could bode well for business confidence and activity over time.”
Investors appeared pleased with Powell’s positive take on the economy. The Dow Jones Industrial Average closed up 115 points, or 0.4 per cent. Analysts also noted that the year’s third rate cut had been widely expected and that expectations for another cut at the Fed’s next meeting, in December, were already dim.
“He clearly set the bar high for rate cuts in December and January,” said Kathy Bostjancic, chief US financial economist at Oxford Economics.
But Bostjancic and some other economists say they expect growth to keep slowing and to eventually force the Fed’s hand. Bostjancic expects growth to decline to just 1.6% in 2020, below the Fed’s forecast of 2%, and that the policymakers will cut rates sometime next spring.
Powell may be too optimistic about a defusing of the China trade and Brexit threats, Bostjancic said. While President Donald Trump and China’s President Xi Jinping are seeking to agree to an initial pact next month, it would likely leave many significant areas of dispute between the two countries unresolved.
