What the Fed interest rate cut means for your wallet

Is Trump the reason the Fed cut rates?

NEW YORK/WASHINGTON: The U.S. Federal Reserve's decision on Wednesday to lower interest rates may do little to cut some of the costs that matter to many consumers.

From mortgages to credit cards, banks and other lenders may resist offering substantially lowerrates to consumers, analysts said, despite the central bank's widely expected cut, which pulls its target policy rate down to between 2.00% and 2.25%.

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, withrates on the average 30-year U.S. home loan falling under 4.1%, near a 22-month low and more than half a percentage 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 federal funds rate was 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 put housing even more out of reach by spurring demand, driving prices even higher.

It's not clear the Fed's rate cut will push rates lower for new car loans. Auto rates have not declined as much as mortgage rates in recent months, a possible sign of lender concerns over repayment risk. "Auto loan rates have more room to decline, but that will depend on lenders' perception of risk, " Cox Automotive analysts said in a note to clients.

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. Rate cuts also support higher stock prices.

"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."

A Fed interest rate cut is in the bag. What then?

SAN FRANCISCO (Reuters) - U.S. central bankers are expected to lower borrowing costs this week for the first time since the depths of the financial crisis more than a decade ago. That's the easy part.

Whether that inaugurates a series of quarter-percentage-point interest rate cuts that could stretch deep into next year, as financial markets are betting, or something more limited, is by far the harder decision facing Federal Reserve policymakers.

One reason: No clear consensus from Fed officials about why they need to cut rates in the first place, particularly with the U.S. unemployment rate near a 50-year low and the American economy puttering along as the best-in-class performer among developed nations.

Is it a bit of insurance against risks posed by slowing global growth and trade tensions? A step to bolster sluggish inflation? A bid to lift labour markets further? An effort to right kinks in the bond market? Over the last several weeks, Fed policymakers have floated each of these ideas and others.

New York Fed President John Williams even briefly convinced markets the Fed planned to cutrates by half a percentage point this week, until the New York Fed issued a statement to explain that his remarks about "vaccinating" the economy against serious illness were academic in nature and not meant to signal near-term policy decisions.

Complicating matters is the Fed's desire to make clear that loosening monetary policy is not a reaction to months of pressure from U.S. President Donald Trump to do just that.

Investors should get some clarity when the Fed's rate-setting committee releases its policy statement at 2 p.m. EDT (1800 GMT) on Wednesday after the end of a two-day meeting. FedChairman Jerome Powell will hold a press conference shortly after.

Graphic - Not all rate cuts are created equal: https://tmsnrt.rs/30CpwiK

CROSSCURRENTS

Economists and traders overwhelmingly expect the Fed to cut its policy rate by a quarter of a percentage point on Wednesday, matching the size of each of the nine rate hikes the Feddelivered from 2015 to 2018.

The big debate at the July 30-31 meeting will be about what comes next, and how to communicate it, Cornerstone Macro economist Roberto Perli said.

"I bet the statement will... leave the door open to more, to at least another 25 (basis-point cut) down the road, " Perli said.

But as for what economic threshold would trigger a further rate cut, he said, "I don't think they have a clear idea."

The federal funds rate is currently set in a range of 2.25% to 2.50%. Traders of futures tied to the rate have priced in a full percentage-point drop by the end of next year. But the economic picture now is quite different from the last few times the Fed has cut rates.

Since the Fed's last rate-setting meeting in mid-June, economic data on retail sales and job creation have been stronger than expected, and durable goods orders, a proxy for business spending plans, jumped in June. At the same time, U.S. home sales tumbled, manufacturing has been weak for months, and exports are down.

A report on Friday showed robust consumer spending kept the U.S. economy growing at a 2.1% pace in the second quarter, a smaller slowdown than expected. But it also underscored the weak business investment and inflation that has worried Powell.

The competing threads are likely to feed a robust debate during the meeting over whether a ratecut is even needed, and may limit how much more easing could be signalled.

"I think it’s a stretch to think this either is or should be the beginning of an easing cycle; it’s simply not warranted, " said Ward McCarthy, chief U.S. economist at Jefferies.

Some Fed policymakers, including Kansas City Fed President Esther George and Boston FedPresident Eric Rosengren, may even go so far as to register their reservations over further easing with a formal dissent.

'MORE LEEWAY'

Still, the Fed has a lot to contend with.

Mounting signs of weakness in Europe and China and the prospect that new British Prime Minister Boris Johnson will make a messy exit from the European Union have raised the odds of rate cuts abroad, with the European Central Bank looking all but certain to ease policy come September.

Some see rate reductions overseas as building the case for reducing U.S. rates.

Indeed that's been a core argument from Trump, who has accused foreign central bankers of using monetary policy to devalue their currencies. On Monday, Trump repeated those criticisms.

"The E.U. and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product, " he wrote on Twitter. "In the meantime, and with very low inflation, our Fed does nothing - and probably will do very little by comparison. Too bad!"

In gauging the Fed's next step, investors will have no "dot plot" to consult, as they have after with every other policy move since the Fed began in 2012 to publish quarterly interest-rateforecasts from individual policymakers.

Because those forecasts have at times been at odds with the Fed's agreed-upon policy message, their absence could actually make Powell's task easier.

"Not having the projections this month gives them a lot more leeway in sending a message of 'we'll respond as warranted, '" said Richard Moody, chief economist at Regions Financial Corp.

The Fed could also put an early end to planned reductions to its $3.8 trillion balance sheet, built up during years of bond-buying after the 2007-2009 Great Recession. The runoff, seen as tightening policy on the margins, is scheduled to end in September in any case.

Ending it slightly early could defuse criticism that balance sheet policy is working at cross purposes with interest rate policy. And should the Fed disappoint markets by signalling furtherrate cuts are less than a sure thing, Moody said, a change to the balance sheet plan could be a "consolation prize."

Is Trump the reason the Fed cut rates?

U.S. President Donald Trump's repeated calls for easier monetary policy may not be what drove the Federal Reserve to cut interest rates on Wednesday.

But Trump's policies did set the table for it.

His aggressive tactics on trade, including 25% tariffs on $200 billion of Chinese goods that prompted retaliatory duties on U.S. exports, have made companies uncertain about the future and more hesitant to invest.

The Fed's beige book, a collection of economic anecdotes from around the country, now regularly features an escalating and eclectic collection of trade-related impacts.

In the edition circulated ahead of Wednesday's Fed meeting, a company in the Northeast complaining about the cost of keeping track of tariffs and a West Virginia rubber manufacturer saying trade wars had hurt demand from Chinese customers were among dozens of examples.

The impact is in the hard data as well. A report last week showing the U.S. economy grew at a 2.1% pace in the second quarter featured the first drop in business investment since 2016, and trade overall was a net drag on growth.

And it is one factor in the global manufacturing chill, exacerbating weakness from longstanding factors like aging demographics in Europe and Japan.

Trade uncertainty, weak business investment, and sluggish growth abroad were the three main reasons cited by Fed Chair Jerome Powell for cutting rates on Wednesday to between 2.00% and 2.25%.

"The trade war has been disruptive to the global economy and it's created a feedback loop" that poses a risk to U.S. growth, said Eric Winograd, Senior U.S. Economist at AllianceBernstein.

Fed policymakers "are responding primarily to risks, and most of the risks to which they are responding are coming out of the administration."

At the same time, Winograd said, there's nothing usual about White House policies impacting the economy. Tax cuts by George W. Bush, tax hikes under George H. W. Bush, and government spending under Barack Obama are among examples under prior presidents, he said.

Some risks to which the Fed's rate cut is meant to respond are not of Trump's making.

Chief among these is low inflation, which Powell also said was a factor in the Fed's rate cut decision in remarks to reporters on Wednesday afternoon following the committee's action. Slow rising prices predate Trump's tenure by years and is at least in part driven by global competition and technological innovation. Trade tariffs if anything tend to raise prices, at least temporarily.

And while Trump's tax cuts last year triggered faster-than-expected growth in the economy, sparking concern from some Fed officials about a slowdown once the tax break boost waned, consumer spending has stayed strong, surging at a 4.3% annual rate in the second quarter.

Still, the Fed's rate cut is at least in part a response to Trump's actions, if not to his words.

But the president wants more, and after Powell's press conference on Wednesday, Trump took to Twitter to voice displeasure with his hand-picked Fed chief's signal that the central bank was not embarking on a full-blown rate-cutting cycle.

"What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world," Trump tweeted.

"As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place," Trump added in reference to the reduction in the Fed's vast bond holdings over the past two years. The Fed also called an early halt to that on Wednesday.

Powell, for his part, again insisted he and his colleagues do not take politics into account in deciding on rate policy, nor do they conduct policy to demonstrate their independence.

"Trump has obviously attempted to influence the Federal Reserve to further his agenda," said Nick Maroutsos, Co-Head of Global Bonds at Janus Henderson Investors. And as the 2020 presidential race heats up, he is unlikely to stop. "Trump wants lower rates, to keep down the dollar – a lower dollar - and all of that will help his campaign." - Reuters

- Reuters