Are the Fed's rate cuts helping? Have a look
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[October 31, 2019] By
Jonnelle Marte and Dan Burns
NEW YORK/WASHINGTON (Reuters) - Ask a
Federal Reserve official if the clutch of interest rate cuts it has
delivered this year are helping the economy and you will get a swift
answer: Yes.
Fed Chair Jerome Powell said as much on Wednesday after the central bank
cut borrowing costs for the third time since July, saying officials "see
now more clearly the effects of more accommodative monetary policy on
various kinds of consumer activity."
"You are seeing strong durable goods sales. You are seeing housing now
contributing to growth for the first time in a while. And you are seeing
retail sales," Powell said at his news conference following the Fed's
interest rate announcement. "More broadly, monetary policy is also
supporting household spending and home buying by keeping the labor
market strong, keeping workers incomes rising, and keeping consumer
confidence at high levels."
Graphic: U.S. Fed funds rate,
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Indeed, there is evidence that Powell and his colleagues are not tooting
their own horns without some justification.
![](http://archives.lincolndailynews.com/2019/Oct/31/images/ads/current/castlemanor_sda_FINANCIAL_2017.png)
The housing market is showing green shoots as mortgage rates have
dropped. Car loans are in greater demand, and sales of high-priced
vehicles like pickup trucks are near a record. Stocks are reaching fresh
highs. Consumers, fortified by a strong labor market, continue to spend.
It is not all wine and roses, however, as business spending, which has
been hit by the Trump administration's trade war with China, has so far
not responded to the Fed's easing with the same gusto.
Here is a look at the various ways the central bank's rate reductions
are already showing up throughout the economy:
HELP FOR HOUSING
Lower mortgage rates are helping to revive activity in the U.S. housing
market, which stalled last year amid rising rates and higher home
prices. Home construction added to growth in the third quarter for the
first time in nearly two years, the Commerce Department said on
Wednesday.
The pending home sales index, which is based on contracts signed in
September, rose by 1.5% and is near a two-year high, according to the
National Association of Realtors. Still, a shortage of homes for sale is
limiting overall growth in the housing market.
The homes that are for sale are now becoming more affordable because of
lower mortgage rates.
A home buyer earning the national median income would need to spend
20.7% of pay to make the monthly principal and interest payment on an
average priced home as of the end of September when 30-year fixed rate
mortgages were at 3.64%, according to an analysis by Black Knight Inc.
That is down from last November, when payments ate up 23.7% of the
median income and affordability reached a nine-year low.
Refinancing activity is also up since August as homeowners move to lock
in lower rates and reduce their monthly payments.
Graphic: The housing market is recovering,
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DRIVING CAR AND TRUCK SALES
Banks are reporting resurgent demand for auto loans as rates have
fallen, according to the Fed's quarterly senior loan officer opinion
survey.
Spending on consumer durables that are sensitive to interest rates,
including cars, rose by an annualized rate of 7.6% in the third quarter,
according to a report from Morgan Stanley.
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![](../images/103119pics/busine21.jpg)
Federal Reserve Chair Jerome Powell holds a news conference
following the Oct. 29-30 Federal Open Market Committee
meeting in Washington, U.S., October 30, 2019. REUTERS/Sarah
Silbiger
![](http://archives.lincolndailynews.com/2019/Oct/31/images/ads/current/graue_preowned_102819.png)
Total sales have rebounded from a four-year low earlier this year and are back
running at more than 17 million vehicles annually. Sales of pickup trucks and
sport utility vehicles, which sport higher sales prices and now dominate the
new-vehicle market, were just shy of a record in September.
Graphic: Auto loan demand,
https://fingfx.thomsonreuters.com/
gfx/mkt/12/7981/7912/Pasted%20Image.jpg,
Graphic: U.S. auto sales have rebounded,
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/gfx/mkt/12/7982/7913/Pasted%20Image.jpg
WEALTH AND EASY MONEY
The S&P 500 index closed at a record high on Wednesday after the Fed announced
the third rate cut. Investors are more optimistic about the economic outlook
after positive developments in the prolonged trade dispute with China and the
risks of a no-deal Brexit decreased.
The Fed's actions to lower borrowing costs and improve liquidity in money
markets could also be contributing to investor confidence. Some investors might
be turning to stocks in search of higher returns at a time when bond yields are
low.
"If you have a need to generate some sort of meaningful return, you're going to
buy stocks," said David Spika, president of GuideStone Capital Management.
Since January, when Powell and the Fed signaled they had pivoted away from
raising rates, conditions in key corporate credit markets have eased
substantially. The yield spread for junk bonds - a measure of the added
compensation investors demand for owning risky corporate debt rather than safer
government bonds - has narrowed substantially.
Graphic: Financial conditions have eased,
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WEAK SPOTS REMAIN
The big sore spot for both the Fed and the economy at large is a reluctance by
U.S. businesses to spend, a hesitance Fed officials and corporate executives
blame on Trump's unpredictable trade policy.
![](http://archives.lincolndailynews.com/2019/Oct/31/images/ads/current/charrons_bch041713.png)
In Wednesday's first reading of gross domestic product for the third quarter,
the Commerce Department said business investment was a net drag on the economy
for the second quarter in a row. The last time that happened was a decade ago
during the Great Recession.
Businesses also appear hesitant to borrow to fund investment. The Fed's latest
senior loan officer survey showed softening commercial loan demand for a fourth
straight quarter, and year-over-year growth in commercial and industrial loans
outstanding has fallen by half in the past six months.
Graphic: Contributions to U.S. gross domestic product,
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gfx/mkt/12/7990/7921/Pasted%20Image.jpg
Graphic: U.S. commercial loan demand,
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(Reporting by Jonnelle Marte and Dan Burns; Editing by Peter Cooney)
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