|30 October, 2019

Fed cut is over-stuffing the cushion this time

The trajectory of growth in the United States is mellowing after a tax-cut-infused acceleration

A woman jogs past the Federal Reserve headquarters in Washington September 16, 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade.

A woman jogs past the Federal Reserve headquarters in Washington September 16, 2015. The Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade.

Reuters/Kevin Lamarque

NEW YORK  - The Powell put should perhaps be renamed the Powell punt. Traders got what they wanted on Wednesday, with another interest-rate cut from the U.S. Federal Reserve, chaired by Jay Powell. But the S&P 500 Index hit a record closing high this week, the economy is chugging along at a solid – if not spectacular – pace, and inflation has crept up. The Fed’s self-proclaimed data dependency is looking more like addiction to the markets drug.

Meanwhile, U.S. GDP grew at a 1.9% annual pace in the third quarter – nothing to write home about, but above many economists’ forecasts. And the employment picture also doesn’t look too shabby. America’s jobless rate of 3.5% remains near a 50-year low. Another monthly report is due on Friday, but so far this year jobs are being added at a slower but steady rate consistent with a solid economy not juiced by a massive tax cut.

And inflation – despite claims to the contrary – is not dead yet. The pace of price increases by the personal consumption expenditures measure, excluding food and energy, was an annualized 2.2% in the third quarter. That’s above the Fed’s central 2% target. That might not last, but inflation remains right around the sweet spot.

It’s true that durable-goods orders took a hit in September, but a lot of that can be blamed on Boeing’s grounded fleet of 737 MAX jets. And although a shortage of business investment is tamping down growth, it’s hard not to blame this on trade uncertainty, which is something Fed policy can’t fix. And consumer spending, a mainstay of the U.S. economy, is holding up.

The trajectory of growth is mellowing after a tax-cut-infused acceleration. But that’s what is supposed to happen. One rate cut might be seen as insurance, but three in a row looks like a trend. Yet the data doesn’t seem to fit. It’s easy to suspect the Fed cut again largely because financial bets implied over 99% confidence that it would. The Fed’s statement dropped a phrase about acting further, perhaps signaling a pause to come. But if he’s watching markets too closely, Powell may find it tough to take back the ball.

CONTEXT NEWS

- The U.S. Federal Reserve’s policy-setting committee on Oct. 30 cut its target range for the overnight federal funds interest rate by a quarter point to 1.5%-1.75%, the third straight reduction since July. It signaled the rate-cut cycle might be at a pause. The Federal Open Market Committee dropped a previous reference in its policy statement that it "will act as appropriate" to sustain the economic expansion – language that was considered a sign for future rate cuts.

- U.S. gross domestic product grew at a 1.9% annualized rate in the third quarter, mostly on the back of inventory accumulation, consumer spending and government spending, the Bureau of Economic Analysis said on Oct. 30. Business investment declined for the second straight quarter according to the first official GDP estimate for the period. The BEA says annualized growth was 3.1% in the first quarter this year and 2% in the second quarter.

(Editing by Richard Beales and Amanda Gomez)

© Reuters News 2019

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