US Fed expected to cut rate, but resilient economy may signal pause ahead

The Federal Reserve is expected to reduce interest rates on Wednesday, but new data showing resilient US economic growth may make that rate cut the last for now.

The expected quarter-percentage-point cut, which would bring the US central bank's target overnight interest rate to a range of between 1.50% and 1.75%, would be the third reduction in borrowing costs this year. The moves have been taken to help nudge along a US economic expansion threatened by slowing global growth and the impact of a US-China trade war.

The strategy appears to be working.

Government data released on Wednesday showed the economy grew at a 1.9% annual rate in the third quarter, a slowdown from the first half of the year but not as sharp a decline as many economists expected and some Fed officials feared.

 

A closely watched measure of inflation ticked higher, to 2.2 per cent, slightly above the Fed's 2% annual target. The S&P 500 index hit a record high, and aspects of the bond market that had concerned Fed officials have growth steadily healthier since policymakers last met in September.

Consumer spending, a mainstay of the US economy, remained strong enough to offset the impacts of ebbing global trade and business investment so weak that it continued to be a drag on growth overall.

Notably, investment in housing added to growth for the first time since the end of 2017, evidence the Fed's rate cuts may be having the desired impact in that sector of the economy even if business spending continues to disappoint.

Though the Fed does not set long-term interest rates directly, its management of short-term rates does influence how much banks charge for 30-year home mortgages and other important consumer financing tools.

"The damage being done by the trade war is plain to see in the business investment numbers," said Brian Coulton, chief economist with Fitch Ratings. "Consumer-facing indicators are holding up better ... Housing investment recovered ... likely boosted by lower rates. There is nothing in here to change our baseline view that U.S. recession will be avoided."

The Fed is scheduled to release its latest policy decision at 2 p.m. EDT (1800 GMT). Fed Chair Jerome Powell will hold a news conference a half hour later.

BALANCE SHEET

The two-day policy meeting this week is the first since the Fed announced new policies for managing its balance sheet, including allowing its asset holdings to continue to grow again with the purchase of $60 billion a month in Treasury bills.

Though authorised in order to ensure financial markets function smoothly, those steps have had another positive impact - successfully divorcing the Fed's balance sheet policy from its decisions on interest rates.

The mingling of the two, in the minds of investors at least, had been a headache over the past year for Powell.

"I do think the two issues are separate, and they have and will continue to try and reinforce that," said Karim Basta, chief economist for III Capital Management. "My main interest at the next meeting is more on the interest rate policy and how they might characterize the risks."

The policy statement and Powell's news appearance will give Fed officials a chance to explain how they now assess those risks in light of the latest GDP numbers, and whether they feel more rate-cut "insurance" is needed for the country's longest-ever economic expansion to continue.

Since the Fed last met in September, other data has been mixed, including a weak showing for job growth in September.

But there have been positive developments as well, including progress in U.S.-China trade talks and some sense that other key global risks may be skirted.