U.S. Fed cuts interest rates, and signals it is on hold

U.S. Fed cuts interest rates, and signals it is on hold
By Howard Schneider and Lindsay Dunsmuir

WASHINGTON (Reuters) – The Federal Reserve on Wednesday cut interest rates for the third time this year to ensure the U.S. economy weathers a global trade war without slipping into a recession, but signaled it will leave borrowing costs where they are unless things take a material turn for the worse.

“We believe that monetary policy is in a good place,” Fed Chair Jerome Powell said in a news conference after the U.S. central bank announced its decision to cut its key overnight lending rate by a quarter of a percentage point to a target range of between 1.50% and 1.75%.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” he said.

Risks relating to global trade, as well as to the prospect that Britain would crash out of the European Union, have moved in a “positive direction” since the Fed’s last meeting, Powell said, adding that the U.S. economy has remained resilient.

With the stimulative effects of the Fed’s rate cuts so far this year still working their way through the economy, only “a material reassessment of our outlook” could drive the central bank to cut rates further from here, Powell said. Currently the Fed expects moderate economic growth, a continued strong labor market, and inflation to move back up to its 2% annual target.

In the statement accompanying its decision to cut rates, the Fed dropped a previous reference that it “will act as appropriate” to sustain the economic expansion – language that was considered a sign for future rate cuts.

Instead, the Fed said it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target interest rate, a less decisive phrase.

Kansas City Fed President Esther George and Boston Fed President Eric Rosengren dissented from the decision. They have opposed all three Fed rate cuts this year as unnecessary.

St. Louis Fed President James Bullard, who had dissented in September because he supported a bigger rate cut then, voted with the majority on Wednesday, an indication that pressure within the Fed for further rate cuts may have lessened.

The rate cut was widely anticipated by financial markets, but expectations for additional cuts after October have diminished significantly in recent weeks.

While yields on longer-dated bonds showed little reaction, those on shorter-dated maturities that are more closely influenced by Fed policy expectations, moved higher. The yield on the 2-year note <US2YT=RR> rose to the highest since Oct. 1 at about 1.67%.

U.S. stocks, down modestly before the Fed’s statement, pared some of their losses and were little changed on the day. The benchmark S&P 500 Index <.SPX>, which had hit a record high earlier in the week, was down fractionally.

“It’s pretty much what was expected,” said Jim Powers, director of investment research at Delegate Advisors.

“The more important outcome is they removed the phrase ‘act as appropriate.’ It looks like the market is taking that to mean that there will be a pause in the declining rate path they were on beforehand. That’s what was expected, and that’s generally a good thing,” Powers said.

UNUSUAL JUNCTURE

The central bank and U.S. economy are at an unusual juncture.

Unemployment is near a 50-year low, inflation is moderate, and data earlier on Wednesday showed gross domestic product grew at an annual rate of 1.9% 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.

But parts of the economy, particularly manufacturing, have stuttered in recent months as the global economy slowed. Businesses have pared investment in response to the U.S.-China trade war that both raised tariffs on many goods, and also made the world a riskier place to make long-term commitments.

While that has not had an obvious impact yet on U.S. hiring or consumer spending, Fed officials felt a round of “insurance” rate cuts was appropriate to guard against a worse outcome. The Fed cut rates in July and again in September, and by doing so hoped to encourage businesses and consumers with more affordable borrowing costs.

The approach was successful in the 1990s when risks developed during another prolonged period of economic growth.

(Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Ross Kerber in New York; Editing by Paul Simao)

Fed cuts rates on 7-3 vote, gives mixed signals on next move

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The U.S. Federal Reserve cut interest rates by a quarter of a percentage point for the second time this year on Wednesday in a widely expected move meant to sustain a decade-long economic expansion, but gave mixed signals about what may happen next.

The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed this week.

In lowering the benchmark overnight lending rate to a range of 1.75% to 2.00% on a 7-3 vote, the Fed’s policy-setting committee nodded to ongoing global risks and “weakened” business investment and exports.

Though the U.S. economy continues growing at a “moderate” rate and the labor market “remains strong,” the Fed said in its policy statement that it was cutting rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

With continued growth and strong hiring “the most likely outcomes,” the Fed nevertheless cited “uncertainties” about the outlook and pledged to “act as appropriate” to sustain the expansion.

U.S. stocks, lower ahead of the statement, dropped further, and Treasury yields ticked up from their lows of the day. The S&P 500 was last down 0.64% and the 10-year Treasury note yield inched up to 1.77%.

The dollar gained ground against the euro and yen.

“Another rate cut from the Fed to try to shield the U.S. economy from global headwinds,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “Today’s move was more of a hawkish easing in that the Fed’s median forecasts for rates suggested no more cuts this year, while some officials dissented.”

New projections showed policymakers at the median expected rates to stay within the new range through 2020. However, in a sign of ongoing divisions within the Fed, seven of 17 policymakers projected one more quarter-point rate cut in 2019.

Five others, in contrast, see rates as needing to rise by the end of the year.

The divisions were reflected in dissents that came from both hawks and doves.

St. Louis President James Bullard wanted a half-point cut while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George did not want a rate cut at all.

There was little change in policymakers’ projections for the economy, with growth seen at a slightly higher 2.2% this year and the unemployment rate to be 3.7% through 2020. Inflation is projected to be 1.5% for the year, below the Fed’s 2% target, before rising to 1.9% next year.

Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the policy decision.

The rate cut fell short of the more aggressive reduction in borrowing costs that President Donald Trump had demanded from Fed officials, whom he has insulted as “boneheads” who have put the economic recovery in jeopardy.

The Fed also cut rates in July, the first such move since 2008.

Fed officials have said the rate cuts are justified largely because of risks raised by Trump’s trade war with China, a global economic slowdown and other overseas developments.

Their aim, they say, is to balance the potential need for lower rates against the risk that cheaper money may cause households and businesses to borrow too much, as happened in the run-up to the financial crisis more than a decade ago.

(Reporting by Howard Schneider and Ann Saphir; Additional reporting by Richard Leong in New York; Editing by Paul Simao and Dan Burns)

Explainer: The Fed has a repo problem. What’s that?

By Richard Leong

(Reuters) – As if the U.S. Federal Reserve didn’t already have enough on its plate heading into its meeting on interest rates this week, chaos deep inside the plumbing of the U.S. financial system has thrown policymakers an unexpected curveball.

Cash available to banks for their short-term funding needs all but dried up on Monday and Tuesday, and interest rates in U.S. money markets shot up to as high as 10% for some overnight loans, more than four times the Fed’s rate.

That forced the Fed to make an emergency injection of more than $50 billion, its first since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher. It will conduct another one on Wednesday.

The exact cause of the squeeze is a matter of some debate, but most market participants agree that two coincidental events on Monday were at least partly to blame. First, corporations had to withdraw funds from money market accounts to pay for quarterly tax bills, and then on the same day the banks and investors who bought the $78 billion of U.S. Treasury notes and bonds sold by Uncle Sam last week had to settle up.

On top of that, the reserves that banks park with the Fed and are often made available to other banks on an overnight basis are at their lowest since 2011 thanks to the central bank’s culling of its vast portfolio of bonds over the past few years.

Added together, these factors are testing the limits of the $2.2 trillion repurchase agreement – or repo – market, a gray but essential component of the U.S. financial system.

Whatever the cause, the episode has added fuel to the argument that the Fed needs to take steps to avoid more disruptions in the repo market down the road.

WHY IS THE REPO MARKET IMPORTANT?

The repo market underpins much of the U.S. financial system, helping to ensure banks have the liquidity to meet their daily operational needs and maintain sufficient reserves.

In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight, to finance their trading and lending activities. The next day, borrowers repay their loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.

The system typically hums along with the interest rate charged on repo deals hovering close to the Fed’s benchmark overnight rate, currently set in a range of 2.00% to 2.25%. That rate is expected to be cut by a quarter percentage point on Wednesday.

But sometimes, investors get fearful of lending, as seen during the global credit crisis, or at other times there are just not enough reserves or cash in the system to lend out, as appeared to be the case this week. And that can cause a squeeze on the market and send borrowing costs zooming higher.

But when investors get fearful of lending, as seen during the global credit crisis, or when there are just not enough reserves or cash in the system to lend out, it sends the repo rate soaring above the Fed Funds rate.

Trading in stocks and bonds can become difficult. It can also pinch lending to businesses and consumers and, if the disruption is prolonged, it can become a drag on a U.S. economy that relies heavily on the flow of credit.

WHAT HAS CAUSED THE DROP IN BANK RESERVES?

Coming out of the financial crisis, after the Fed cut interest rates to near zero and bought more than $3.5 trillion of bonds, banks built up massive reserves held at the Fed.

But that level of bank reserves, which peaked at nearly $2.8 trillion, began falling when the Fed started raising interest rates in late 2015. They fell even faster when the Fed started to cut the size of its bond portfolio about two years later.

The Fed stopped raising interest rates last year and cut them in July and is expected to do so again on Wednesday. It has also now ceased allowing to bonds to roll off its balance sheet.

The question vexing policymakers now is whether those actions are enough to stop the downward drift in reserves, which are a main source of liquidity in funding markets like repo.

Bank reserves at the Fed last stood at $1.47 trillion, the lowest level since 2011 and nearly 50% below their peak from five years ago.

WHAT CAN THE FED DO TO CALM THE REPO MARKET?

1. RUN SPOT REPO OPERATIONS

Through the Federal Reserve Bank of New York, the Fed can conduct occasional spot repo operations at times of funding stress, allowing banks and dealers to swap their Treasuries and other high-quality securities for cash at a minimal interest rate. It did this on Tuesday and will do it again on Wednesday.

2. LOWER THE INTEREST IT PAYS ON EXCESS RESERVES

By making it less profitable for banks, especially foreign ones, to leave their reserves at the Fed, it may encourage banks to lend to each other in money markets.

3. CREATE A STANDING REPO FACILITY

Such a permanent financing program will allow eligible participants to exchange their bonds for cash at a set interest rate.

Fed and its staff have considered such a facility, but they have not determined who qualifies, what would be the level of interest paid and the timing for a possible launch.

4. RAMP UP BUYING OF TREASURIES

The Fed can replenish the level of bank reserves by slightly increasing its holdings of U.S. government debt. This comes with the risk that it may be perceived as a resurrection of quantitative easing rather than a technical adjustment.

(Reporting by Richard Leong; Editing by Dan Burns and Richard Borsuk)

Predicting the next U.S. recession, investors apprehensive

FILE PHOTO: Ships and shipping containers are pictured at the port of Long Beach in Long Beach, California, U.S., January 30, 2019. REUTERS/Mike Blake

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – A protracted trade war between China and the United States, the world’s largest economies, and a deteriorating global growth outlook has left investors apprehensive about the end to the longest expansion in American history.

The recent rise in U.S.-China trade war tensions has brought forward the next U.S. recession, according to a majority of economists polled by Reuters who now expect the Federal Reserve to cut rates again in September and once more next year.

Trade tensions have pulled corporate confidence and global growth to multi-year lows and U.S. President Donald Trump’s announcement of more tariffs have raised downside risks significantly, Morgan Stanley analysts said in a recent note.

Morgan Stanley forecast that if the U.S. lifts tariffs on all imports from China to 25 percent for 4-6 months and China takes countermeasures, the U.S. would be in recession in three quarters.

Goldman Sachs Group Inc <GS.N> said on Sunday that fears of the U.S.-China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world’s two largest economies before the 2020 U.S. presidential election.

Global markets remain on edge with trade-related headlines spurring big moves in either direction. On Tuesday, U.S. stocks jumped sharply higher and safe-havens like the Japanese yen and Gold retreated after the U.S. Trade Representative said additional tariffs on some Chinese goods, including cell phones and laptops, will be delayed to Dec. 15.

Besides watching developments on the trade front economists and investors are watching for signs they hope can alert them to a coming recession.

1. THE YIELD CURVE

The U.S. yield curve plots Treasury securities with maturities ranging from 4 weeks to 30 years. When the spread between the yield on the 3-month Treasury bill and that of the 10-year Treasury note slips below zero, as it did earlier this year, it points to investors accepting a lower yield for locking money up for a longer period of time.

As recession signals go, this so-called inversion in the yield curve has a solid track record as a predictor of recessions. But it can take as long as two years for a recession to follow a yield curve inversion.

The closely-followed yield spread between U.S. 2-year and 10-year notes has also narrowed – marking the smallest difference since at 2007 – according to Refinitiv data.

GRAPHIC – Yield curve as a predictor of recessions🙂

2. UNEMPLOYMENT

The unemployment rate and initial jobless claims ticked higher just ahead or in the early days of the last two recessions before rising sharply. Currently the U.S. unemployment rate is near a 50-year low.

“Although job gains have slowed this year, they continue to signal an above-trend economy,” economists at BofA Merrill Lynch Global Research said in a recent note.

Claims will be watched over the coming weeks for signs that deteriorating trade relations between the United States and China, which have dimmed the economy’s outlook and roiled financial markets, were spilling over to the labor market.

(GRAPHIC – Unemployment rate: )

3. GDP OUTPUT GAP

The output gap is the difference between actual and potential economic output and is used to gauge the health of the economy.

A positive output gap, like the one now, indicates that the economy is operating above its potential. Typically the economy operates furthest below its potential at the end of recessions and peaks above its potential towards the end of expansions.

However, the output gap can linger in positive territory for years before a recession hits.

(GRAPHIC – The GDP output gap peaks before recessions🙂

4. CONSUMER CONFIDENCE

Consumer demand is a critical driver of the U.S. economy and historically consumer confidence wanes during downturns. Currently consumer confidence is near cyclical highs.

(GRAPHIC – Consumer confidence is at cyclical highs: )

5. STOCK MARKETS

Falling equity markets can signal a recession is looming or has already started to take hold. Markets turned down before the 2001 recession and tumbled at the start of the 2008 recession.

The recent pullback in U.S. stocks has done its share to raise concerns about whether the economy is heading into a recession. On a 12-month rolling basis, the market has turned down ahead of the last two recessions. The 12-month rolling average percent move is now below the recent highs of January 2018 but still above higher than the lows hit in December.

(GRAPHIC – The S&P 500 has fallen during recessions🙂

6. BOOM-BUST BAROMETER

The Boom-Bust Barometer devised by Ed Yardeni at Yardeni Research measures spot prices of industrials inputs like copper, steel and lead scrap, and divides that by initial unemployment claims. The measure fell before or during the last two recessions and has retreated from a peak hit in April.

(GRAPHIC – The Boom-Bust Barometer🙂

7. HOUSING MARKET

Housing starts and building permits have fallen ahead of some recent recessions. U.S. homebuilding fell for a second straight month in June and permits dropped to a two-year low, suggesting the housing market continued to struggle despite lower mortgage rates.

(GRAPHIC – Housing starts have fallen before prior recessions: )

8. MANUFACTURING

Given the manufacturing sector’s diminished role in the U.S. economy, the clout of the Institute for Supply Management’s (ISM) manufacturing index as a predictor of U.S. GDP growth has slipped in recent years. However, it is still worth watching, especially if it shows a tendency to drop well below the 50 level for an extended period of time.

ISM said its index of national factory activity slipped to 51.2 last month, the lowest reading since August 2016, as U.S. manufacturing activity slowed to a near three-year low in July and hiring at factories shifted into lower gear, suggesting a further loss of momentum in economic growth early in the third quarter.

“The slowdown in manufacturing activity likely reflects, in part, the tariffs that went into effect over the course of last year,” economists at BofA Merrill Lynch Global Research said in a note on Friday.

(GRAPHIC – ISM Manufacturing Index: )

9. EARNINGS

S&P 500 earnings growth dipped ahead of the last recession. Earnings estimates for S&P 500 companies have been coming down but companies are still expected to post growth for most quarters this year.

(GRAPHIC – Earnings fell during the last recession: )

10. HIGH-YIELD SPREADS

The gap between high-yield and U.S. government bond yields rose ahead of the 2007-2009 recession and then widened dramatically.

Credit spreads typically widen when perceived risk of default rises. Spreads have fallen from their January highs.

(GRAPHIC – Junk bond yields jumped in the 2008 recession🙂

11. FREIGHT SHIPMENTS

The Cass Freight Index, a barometer of the health of the shipping industry produced by data company Cass Information Systems Inc, logged a 5.3% year-over-year decline in June. That marked the index’s seventh straight month with a negative reading on a year-over-year basis.

“Whether it is a result of contagion or trade disputes, there is growing evidence from freight flows that the economy is beginning to contract,” Broughton Capital analyst Donald Broughton wrote in the June Cass Freight Index report.

(GRAPHIC – Cass Freight Index – shipments🙂

12. MISERY INDEX

The so-called Misery Index adds together the unemployment rate and the inflation rate. It typically rises during recessions and sometimes prior to downturns. It has slipped lower in 2019 and does not look very miserable.

(GRAPHIC – The Misery Index: )

(Reporting by Saqib Iqbal Ahmed; Editing by Chizu Nomiyama)

U.S. hiring slows; shorter factory workweek a red flag

FILE PHOTO: An assembly line worker works on the production line at Renegade RV manufacturing plant in Bristol, Indiana, U.S., April 16, 2019. REUTERS/Tim Aeppel

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth slowed in July and manufacturers slashed hours for workers, which together with an escalation in trade tensions between the United States and China could give the Federal Reserve ammunition to cut interest rates again next month.

The Labor Department’s closely watched monthly employment report on Friday came a day after President Donald Trump announced an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1, a move that led financial markets to fully price in a rate cut in September.

The U.S. central bank on Wednesday cut its short-term interest rate for the first time since 2008. Fed Chairman Jerome Powell described the widely anticipated 25-basis-point monetary policy easing as insurance against downside risks to the 10-year old economic expansion, the longest in history, from trade tensions and slowing global growth.

“Fed officials don’t exactly have mud in their eyes after cutting interest rates this week as job growth is slowing with the rest of the world,” said Chris Rupkey, chief economist at MUFG in New York. “We see nothing in today’s report to stop a second rate cut next month.”

Nonfarm payrolls increased by 164,000 jobs last month, the government said. The economy created 41,000 fewer jobs in May and June than previously reported. July’s job gains were in line with economists’ expectations.

Underscoring the moderation in hiring, the average workweek fell to its lowest level in nearly two years in July as manufacturers cut hours for workers. Hours were also reduced in other industries, contributing to the workweek’s drop to 34.3 hours, the fewest since September 2017, from 34.4 hours in June.

“The decline in hours worked suggests that employers may be pulling back more than headline hiring would suggest,” said Andrew Schneider, a U.S. economist at BNP Paribas in New York.

A measure of hours worked, which is a proxy for gross domestic product, fell 0.2% in July, pointing to weak output.

The U.S.-China trade war is taking a toll on manufacturing, with production declining for two straight quarters. Business investment has also been hit, contracting in the second quarter for the first time in more than three years and helping to hold back the economy to a 2.1% annualized growth rate. The economy grew at a 3.1% pace in the first quarter.

The White House’s “America First” policies are also restricting trade flows. A separate report from the Commerce Department on Friday showed sharp declines in both imports and exports in June, leading a 0.3% dip in the trade deficit to $55.2 billion during the month.

Job gains over the last three months averaged 140,000 per month, the fewest in nearly two years, compared to 223,000 in 2018. Economists say it is unclear whether the loss of momentum in hiring was due to ebbing demand for labor or a shortage of qualified workers.

Still, the pace of job gains remains well above the roughly 100,000 needed per month to keep up with growth in the working-age population. The unemployment rate was unchanged at 3.7% in July as 370,000 people entered the labor force.

Despite the lowest jobless rate in nearly 50 years, wage gains remain moderate, contributing to a tame inflation environment, which could be supportive of a rate cut at the Fed’s Sept. 17-18 policy meeting.

Inflation has undershot the central bank’s 2% target this year, rising 1.6% on a year-on-year basis in June after a 1.5% gain in May. Average hourly earnings rose 8 cents, or 0.3%, in July, after the same increase in June. That lifted the annual increase in wages to 3.2% in July from 3.1% in June.

Financial markets have fully priced in a rate cut in September and the chances for further easing in December have increased, according to CME Group’s FedWatch tool.

The dollar <.DXY> was trading lower against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street tumbled to a one-month low.

ECONOMY COOLING

Even with the step-down in employment growth and moderate wage gains, the labor market is supporting the economy as the stimulus from last year’s $1.5 trillion tax cut package fades. The economy is expected to grow around 2.5% this year.

There was some encouraging news on the jobs market. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rose to 63.0% in July from 62.9% in June.

A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, fell two-tenths of a percentage point to 7.0% last month, the lowest level since December 2000.

The moderation in hiring was led by construction, which increased payrolls by 4,000 jobs after creating 18,000 positions in June.

Manufacturing employment rose by 16,000 jobs after advancing by 12,000 in June. The strong gains are at odds with weak factory activity. A survey on Thursday showed manufacturing employment hit its lowest level since November 2016 in July.

The sector, which accounts for more than 12% of the U.S. economy, is also battling an inventory bulge and design problems at aerospace giant Boeing Co <BA.N>. The manufacturing workweek dropped 0.3 hour to 40.4 hours, the lowest since November 2011. Factory overtime fell by 0.2 hour to 3.2 hours.

“A prolonged drop in hours worked signals that businesses may reduce hiring, with layoffs and cutbacks in private spending to potentially follow, said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings in New York.

Government employment increased by 16,000 jobs in July, boosted by local government hiring, adding to June’s gain of 14,000. Professional and business services employment rose by 38,000 jobs last month.

There were also increases in healthcare, leisure and hospitality, financial activities and wholesale trade employment. But retail payrolls dropped by 3,600 jobs, declining for a sixth straight month.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

The Fed will soon cut U.S. interest rates. What will it mean for your wallet?

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

By Trevor Hunnicutt and Jason Lange

NEW YORK/WASHINGTON (Reuters) – A decision by the Federal Reserve to cut interest rates may do little at this point to cut some of the costs that matter to many U.S. consumers.

From mortgages to credit cards, banks and other lenders may resist offering substantially lower rates to consumers, analysts said, even if the central bank makes a widely expected cut to its policy rate, currently targeted between 2.25% and 2.50%.

For one thing, some borrowing costs are already low and markets have already priced in expectations the Fed would support the economy. Mortgage rates have also dropped, with rates on the average 30-year U.S. home loan falling under 4.1%, near a 22-month low, more than half a point below the average since the global financial crisis more than a decade ago, according to the Mortgage Bankers Association.

“If we drive down into the mid-3.7%, mid-3.8% range, you’re talking about historic affordability from a purchasing power standpoint,” said Mark Fleming, chief economist for First American Financial Corp, which provides insurance related to real estate transactions. “There’s not a lot of wiggle room here in the first place. I think we established five or six years ago that a mortgage rate around 3.5% or 3.6% is a floor. That’s about as low as you can go.”

That low mortgage level was when the Fed’s rates were near zero and the central bank was buying mortgage bonds in the aftermath of the financial crisis to drive longer-term rates even lower – a far cry from where policy is now.

At the same time, one of the Fed’s main goals in cutting rates is to bring inflation up to the 2% level policymakers consider healthy, and maybe even higher to make up for long periods of missing that target. If the Fed succeeds, longer-term bonds most sensitive to inflation could fall in price, causing their yields to rise. Because U.S. mortgages are benchmarked to those longer-term bonds, rates could rise again.

For many consumers, the obstacle to buying a house has not been mortgage rates, but stricter lending standards that reduced access to mortgages in the first place. Big price increases and limited supply have also made housing less affordable. Lower rates could make housing even more out of reach by spurring demand, driving prices even higher.

Financing for new cars might be a different story, though, especially given the large role of automakers themselves in the car loan business. Those businesses have an incentive to increase lending to support the auto market.

Savers, meanwhile, have been rewarded in recent months for shopping around for higher-yielding savings accounts and certificates of deposit. Thanks to increased competition, some online banks have been pushing yields up for those products even with the expected rate cut.

That could change if the Fed is embarking on a prolonged series of rate cuts, as some investors are betting. But the biggest factor could still be overall competition between financial institutions for savers’ money, said Morningstar Inc analyst Eric Compton.

Consumers, however, are in a much better place than they have been in years, by some measures. They have higher take-home pay, lower debt and better credit scores than during the financial crisis. “You’ve got consumers that are pretty healthy, savings rates are pretty good,” said Neal Van Zutphen, president of Intrinsic Wealth Counsel Inc, a financial planner. “They’re taking advantage of this anticipatory drop in rates.”

(Reporting by Trevor Hunnicutt in New York and Jason Lange in Washington; Editing by Leslie Adler)

Moderate U.S. consumer spending, inflation support rate cut

FILE PHOTO: A man shops at a store that sells parts and accessories for Recreational Vehicles (RVs) in Orlando, Florida, U.S., June 20, 2019. REUTERS/Carlo Allegri/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer spending and prices rose moderately in June, pointing to slower economic growth and benign inflation that could see the Federal Reserve cutting interest rates on Wednesday for the first time in a decade.

The report from the Commerce Department on Tuesday was released as officials from the Fed were due to gather for a two-day policy meeting against the backdrop of an uncertain economic outlook. The 10-year old economic expansion, the longest in history, is facing headwinds from trade tensions, fears of a disorderly departure from the European Union by Britain and weak global growth.

With those risks in mind, Fed Chairman Jerome Powell early this month signaled the U.S. central would ease monetary policy. A strong labor market and signs that the economy was not slowing abruptly, however, saw financial markets dialing back expectations of a 50 basis point rate cut on Wednesday.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, gained 0.3% as an increase in services and outlays on other goods offset a decline in purchases of motor vehicles.

Data for May was revised up to show consumer spending rising 0.5% instead of the previously reported 0.4% advance. Economists polled by Reuters had forecast consumer spending climbing 0.3% last month.

The data was included in last Friday’s second-quarter gross domestic product report, which showed consumer spending increased at a 4.3% annualized rate, accelerating from a tepid 1.1% pace in the January-March period.

U.S. financial markets were little moved by the data.

SAVINGS SURGE

Robust consumer spending blunted some of the hit to GDP from weak exports, business investment and a slowdown in inventory accumulation. The economy grew at a 2.1% rate last quarter, pulling back from the first quarter’s brisk 3.1% pace.

The economy is slowing largely as the stimulus from last year’s $1.5 trillion tax cut package fades.

Consumer prices as measured by the personal consumption expenditures (PCE) price index edged up 0.1% in June as food and energy prices fell. The PCE price index gained 0.1% in May. In the 12 months through June, the PCE price index rose 1.4% after a similar increase in May.

Excluding the volatile food and energy components, the PCE price index rose 0.2% last month, increasing by the same margin for a third straight month. That lifted the annual increase in the so-called core PCE price index to 1.6% from 1.5% in May.

The core PCE index is the Fed’s preferred inflation measure and has undershot the U.S. central bank’s 2% target this year.

When adjusted for inflation, consumer spending gained 0.2% in June. This so-called real consumer spending rose 0.3% in May. Last month’s small gain in core consumer spending likely sets up consumption for a step-down in the third quarter after the robust growth recorded in the April-June period.

Last month, spending on goods rose 0.3%. Spending on services also rose 0.3%.

Consumer spending in June was supported by a 0.4% rise in personal income, which followed a similar increase in May. Wages increased 0.5%. Savings shot up to $1.34 trillion from $1.31 trillion in May.

(Reporting Lucia Mutikani; Editing by Andrea Ricci)

U.S. home sales tumble as prices race to record high

FILE PHOTO: A real estate sign advertising a home "Under Contract" is pictured in Vienna, Virginia, outside of Washington, October 20, 2014. REUTERS/Larry Downing

By Lucia Mutikani

WASHINGTON (Reuters) – U.S home sales fell more than expected in June as a persistent shortage of properties pushed prices to a record high, suggesting the housing market was struggling to regain speed since hitting a soft patch last year.

Weak housing and manufacturing are holding back the economy, offsetting strong consumer spending. The National Association of Realtors said on Tuesday existing home sales dropped 1.7% to a seasonally adjusted annual rate of 5.27 million units last month. May’s sales pace was revised higher to 5.36 million units from the previously reported 5.34 million units.

“Meager inventory levels, especially in the entry-level segment, and still-rising prices continue to limit the selection of homes available to more budget-conscious buyers,” said Matthew Speakman, an economist at Zillow.

Economists polled by Reuters had forecast existing home sales slipping 0.2% to a rate of 5.33 million units in June. Existing home sales, which make up about 90 percent of U.S. home sales, decreased 2.2% from a year ago. That was the 16th straight year-on-year decline in home sales.

The weakness in housing comes despite cheaper mortgage rates and the lowest unemployment rate in nearly 50 years.

Supply has continued to lag, especially in the lower-price segment of the housing market because of land and labor shortages, as well as expensive building materials. The government reported last week that permits for future home construction dropped to a two-year low in June.

According to the NAR, there was a 19% drop from a year earlier in sales of houses priced $100,000 and below.

The Realtors group said there was strong demand in this market segment, but not enough homes for sale. The NAR also said last year’s revamp of the U.S. tax code, which reduced the amount of mortgage interest payments homeowners could deduct, was weighing on demand for homes priced at $1 million and above.

The 30-year fixed mortgage rate has dropped to an average of 3.81% from a more than seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac. Further declines are likely as the Federal Reserve is expected to cut interest rates next week for the first time in a decade.

Last month, existing-home sales rose in the Northeast and Midwest. They tumbled in the populous South and in the West.

June’s drop in existing homes sales likely means less in brokers’ commissions, which suggests that housing probably remained a drag on the gross domestic product in the second quarter. Spending on homebuilding contracted in the first quarter, the fifth straight quarterly decline.

The Atlanta Fed is forecasting GDP rising at a 1.6% annualized rate in the second quarter. The economy grew at a 3.1% rate in the January-March period. The government will publish it snapshot of second-quarter GDP on Friday.

The PHLX housing index &lt;.HGX&gt; was little changed, underperforming a broadly firmer U.S. stock market. The dollar held near a five-week high against a basket of currencies. U.S. Treasury prices fell.

HOUSE PRICES RE-ACCELERATE

There were 1.93 million previously owned homes on the market in June, up from 1.91 million in May and unchanged from a year ago. The median existing house price increased 4.3% from a year ago to $285,700 in June, an all-time high. House price inflation had been slowing after a jump in mortgage rates last year dampened demand.

Last month, houses for sale typically stayed on the market for 27 days, up from 26 days in May and a year ago. Fifty-six percent of homes sold in June were on the market for less than a month.

At June’s sales pace, it would take 4.4 months to exhaust the current inventory, up from 4.3 months in May. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

First-time buyers accounted for 35% of sales last month, up from 32% in May and 31% a year ago. Economists and realtors say a 40% share of first-time buyers is needed for a robust housing market.

(Reporting by Lucia Mutikani; editing by Andrea Ricci)

Feds seen lowering U.S. rates by late July

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

NEW YORK (Reuters) – The Federal Reserve will likely reduce key U.S. borrowing costs by a quarter-point at its upcoming July 30-31 policy meeting with the chance of a 50 basis-point decrease, Bank of America Merrill Lynch analysts said on Wednesday.

The U.S. central bank would follow a possible July rate cut with two more at the Fed’s next two meetings in the aftermath of a perceived “dovish” testimony from Fed Chairman Jerome Powell before a House panel, the BAML analysts said.

(Reporting by Richard Leong; Editing by Chizu Nomiyama)

Fed faces tougher task in deciding whether to cut U.S. rates

The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/

By Trevor Hunnicutt

NEW YORK (Reuters) – U.S. employers are hiring workers at a brisk pace, but that is only making the Federal Reserve’s job harder.

On Friday, the Labor Department said nonfarm employers added 224,000 jobs last month – the most in five months, and not the kind of labor market that would normally cause policymakers at the U.S. central bank to cut interest rates.

But the Fed opened up the possibility of cuts last month, citing muted inflation pressures and an economic outlook clouded by a U.S. trade war and slower global growth.

This complicates a debate Fed policymakers are having over whether the economy needs stimulus, setting up a possible standoff with markets at their July 30-31 meeting.

“They are in a bit of a bind,” said Karim Basta, chief economist at III Capital Management. “On the surface, the data, in my opinion, doesn’t really support an imminent cut, but markets are expecting it, and I do think there’s a risk at this stage that they disappoint.”

Markets are overwhelmingly betting the Fed’s next move will be its first rate cut since the financial crisis a decade ago, and President Donald Trump on Friday renewed demands for lower rates to strengthen the economy.

Fed Chairman Jerome Powell has repeatedly said the central bank makes decisions independently from both markets and the White House, but failing to deliver a cut could cause a stock and short-term bond selloff and reduce economic activity.

U.S. interest rates futures fell after the jobs report on Friday. Markets still see a rate cut this month as a near-certainty, though they largely priced out changes for an aggressive half-percentage-point cut.

“These are good numbers, but a rate cut in July is still all but inevitable,” said Luke Bartholomew, investment strategist for Aberdeen Standard Investments. “Employment growth remains a bright spot amid a fairly mixed bag of U.S. data and yet markets have come to expect a cut now so (they) will fall out of bed if they don’t get one.”

The U.S. has not resolved its trade dispute with China, but the two countries agreed last weekend to resume trade talks, putting off new tariffs.

There are still signs of a pullback in economic activity. Businesses’ spending on machines and other equipment is tepid, but employers keep hiring hotel maids, electricians, daycare providers and other workers. They are also paying them more. Average hourly earnings rose at a 3.1%-a-year pace. A May payroll gain of 72,000 now seems like a fluke rather than a sign of deterioration.

Those are not the prototypical conditions for a rate cut. Unemployment at 3.7% is near its lowest levels since 1969 and policymakers have traditionally seen job gains with low unemployment posing risks of inflation.

But economists have grown less confident in academic models that forecast an inverse relationship between unemployment and inflation. The core personal consumption expenditures index is running at 1.6% a year, short of the Fed’s 2% goal.

In its semi-annual report to Congress, the Fed on Friday repeated its pledge to “act as appropriate” to sustain the economic expansion, with possible interest rate cuts in the coming months, but notably said the jobs market had “continued to strengthen” so far this year, and described recent weak inflation as due to “transitory influences.”

Some policymakers think a rate cut could lift inflation expectations, reducing chances of more drastic rate cuts being needed later. With rates at 2.25%-2.50%, policymakers have less room to cut before they resort to unconventional measures.

A cut could also reduce the Fed’s firepower in the case of a more severe downturn and signal greater concern about the future and even that more stimulus is on the way.

(Reporting by Trevor Hunnicutt in New York; Additional reporting by April Joyner in New York and Howard Schneider in Washington; Editing by Jennifer Ablan and James Dalgleish)