Fed Cuts Rates Again To Boost A Slowing Economy

Oct 30, 2019
Originally published on October 30, 2019 6:31 pm

Updated at 5:03 p.m. ET

The Federal Reserve cut interest rates by a quarter percentage point Wednesday in an effort to support an economy that continues to tap the brakes.

In announcing the move, Fed Chairman Jerome Powell pointed to weak business investment, which has been a drag on the economy, even as consumer spending has held up relatively well.

"We took this step to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks," he said.

This is the Fed's third interest rate cut since July, and it brings the federal funds rate target down to a range of 1.5% to 1.75%. Falling interest rates have contributed to a modest rebound in the housing market and big-ticket consumer purchases. But they've done little so far to boost business investment.

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Powell suggested a pickup in global demand and a resolution of trade tensions would do more to encourage business spending.

"I think interest rates are a factor in business investment, but I don't believe they're the main factor," he said.

The central bank kept its options open for its next rate-setting meeting in December, saying officials would continue to monitor economic developments. Language promising to "act as appropriate to sustain the expansion" was dropped from the Fed's statement, suggesting officials may not anticipate a need for a fourth rate cut later this year. But Powell left the door open to one, if the economy weakens further.

"Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly," Powell said. "Policy is not on a preset course."

Those comments appeared to reassure investors. Stock indexes rose during Powell's news conference. The Dow Jones Industrial Average ended the day up 115 points, or about 0.4%.

Two members of the Fed's rate-setting committee — Esther George and Eric Rosengren — voted against Wednesday's cut, preferring to leave rates unchanged.

The Commerce Department reported Wednesday that economic growth slowed in the third quarter to just 1.9%. The report showed the Fed's preferred measure of inflation reached 2.2% during the quarter, slightly above the central bank's 2% target.

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AILSA CHANG, HOST:

The U.S. economy has been slowing down, but it got another push this afternoon from the Federal Reserve. Fed Chairman Jerome Powell announced that the central bank is cutting interest rates for the third time since July.

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JEROME POWELL: We took this step to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks.

CHANG: The Fed's action comes on a day the Commerce Department reported that economic growth weakened in the summer and early fall to an annual rate of just 1.9%. To explain what all of this means, we're joined now by NPR's Scott Horsley.

Hey, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you.

CHANG: Now, I understand the Fed's action today was widely anticipated, right? So how did the stock market react to all this?

HORSLEY: There was no surprise in the rate cut itself, but what investors were watching for was how Powell would describe this. You know, was this all there is or is there likely more monetary juice to come later in the year? The official Fed statement seemed to suggest the former. Language that the Fed has used in the past about acting as appropriate to sustain the expansion was missing from today's statement, and one might read that as a hint that this is going to be the last rate cut for a while. But during his news conference, Powell did leave the door open to additional action should the economy weaken further.

(SOUNDBITE OF ARCHIVED RECORDING)

POWELL: Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.

HORSLEY: And that seemed to be enough to reassure investors. All the major market indexes, which were kind of flat during the day, rose during Powell's news conference. The Dow ended the day up about 115 points.

CHANG: All right. So the stock market is doing well, but the broader economy is losing steam. Can you just explain, how does that work? How can that be? How can both things be true?

HORSLEY: For a while now, we've been seeing kind of a two-speed economy. On the consumer side, things have been going pretty well, which is not surprising. We've got a lot of people working. Their wages have been going up modestly, so consumers have money to spend, and they're spending it. Lower interest rates have encouraged that. We're finally seeing a pickup in the housing market thanks to lower mortgage rates. Consumers are buying more refrigerators and other big-ticket items.

But business investment is weak and getting weaker. That is largely because of uncertainty in the global economy. And as a result of the president's trade war, Powell conceded cutting interest rates may not help that much.

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POWELL: I think interest rates are a factor in business investment, but I don't believe they're the main factor and main driver.

HORSLEY: What would help, Powell said, would be a pickup in global demand and some resolution of the trade war. He pointed to some encouraging signs, the possibility, for example, of a mini deal between the U.S. and China. But he added there's still a lot of risk out there.

CHANG: So is there a danger that this overall slowdown in business will spill over into the job market, which has been really strong lately?

HORSLEY: It's certainly a possibility and one that Powell says the Fed is keeping an eye on. But they're not seeing that happen yet. There has been some slowdown in hiring this year, but that's to be expected when you've got a 3 1/2% unemployment rate. We do get another monthly jobs report this Friday, so we'll be watching that closely. But keep in mind, there's an asterisk on that report because it covers the period of the General Motors strike, which idled tens of thousands of autoworkers and others. Powell was careful not to comment on the GM settlement, but he did say that it's good to have that strike resolved.

CHANG: That's NPR's Scott Horsley. Thanks, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.