US Federal Reserve cuts rates by quarter point while hinting at pause

Unemployment continues to drop and consumer spending remains solid

Federal Reserve Board Chairman Jerome Powell holds a news conference on October 30, 2019 in Washington,DC. The US Federal Reserve cut its benchmark interest rate for the third straight time on Wednesday, but the central bank remains divided, with two of the 10 voting members dissenting. And the Fed's policy-setting Federal Open Market Committee made a key change in the wording of the statement, which makes it less certain it will make another move in December.
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The US Federal Reserve reduced interest rates by one quarter of a percentage point for the third time this year and hinted that loosening monetary policy may be at an end, at least for one meeting.

After its two-day meeting, on Wednesday the Federal Open Market Committee dropped from its statement its pledge to “act as appropriate to sustain the expansion”.

It added a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate".

As with the September statement, the committee gave the implications of global developments as a reason for lowering the target range for the central bank’s benchmark rate to between 1.5 and 1.75 per cent.

Treasuries weakened on the Fed’s announcement, pushing the 10-year yield up briefly to 1.81 from 1.80 per cent.

Stocks were little changed and the US dollar gained. Traders also reduced the chances of a fourth consecutive rate cut in December.

The changes to the committee's statement suggest policymakers are prepared to leave rates on hold for some time and assess their effect on the economy.

Chairman Jerome Powell will give a briefing at 10.30pm UAE time.

Mr Powell has said that he did not expect an extended series of rate reductions and that easing was an attempt to provide insurance for an ageing economic expansion threatened by trade tension and faltering global growth.

So far, the strategy appears to be working. While lower rates do little against the uncertain trade situation, unemployment has continued to drop, consumer spending has remained solid and lower mortgage rates have revived the housing market.

Hours before the decision, the Commerce Department reported that the economy grew at a 1.9 per cent annualised pace in the third quarter, beating estimates.

The better-than-expected consumer spending was partly offset by weakness in business investment.

The Fed’s cuts have also calmed markets since the beginning of the year, when investors were nervous that monetary policy was too tight.

Pricing in Fed funds futures implies investors do not fully expect another cut until well into 2020.

The same cannot be said for US President Donald Trump, who has repeatedly attacked the Fed.

Mr Trump complained on Tuesday that it “doesn’t have a clue”, and has called on Mr Powell to slash rates to zero while tweeting support for negative rates applied by central banks in Europe and Japan.

As with the past two cuts, Kansas City Fed president Esther George and Boston’s Eric Rosengren dissented, preferring to keep rates unchanged.

The committee did not release new economic forecasts and rate projections at this meeting, so it is unclear how many non-voters on the committee had also expected a reduction.

The statement again highlighted the essentially positive condition of the US economy.

With unemployment at a half-century low, officials continued to describe the labour market as “strong”, jobs gains as “solid” and household spending as rising at a “strong pace".

At the same time, they repeated a references to “uncertainties’’ in the economic outlook. Officials also made a minor change to say business fixed investment and exports “remain weak". The prior statement said they had weakened.

That softness has shown up in data from the manufacturing sector this year, although factory output rose slightly in the third quarter.

Fed officials have been watching for signs that weakness in manufacturing and faltering confidence in the business sector might threaten consumer spending, particularly if the job market cools.

The Labour Department will release its October employment report on Friday.

Fed officials also said inflation was running below their 2 per cent target and that inflation expectations were little changed.

Officials continued ordering the purchase of Treasury bills to boost bank reserves.

The programme, announced on October 11, is aimed at decreasing volatility in overnight funding markets by increasing the supply of cash for short-term lending.