mcloudy.png
Tuesday June 2nd, 2020 5:13PM

Fed set to cut rates for first time in decade. Is it a risk?

By The Associated Press
Related Articles
  Contact Editor

WASHINGTON (AP) — There's little dispute that the Federal Reserve this week will do something it hasn't done since 2008, when the U.S. economy was gripped by the Great Recession: Cut its benchmark interest rate.

This time, by contrast, the economy is solid by most measures. Consumers are spending. Unemployment is close to a half-century low. A recession hardly seems imminent.

Yet the Fed under Chairman Jerome Powell has signaled that rising economic pressures — notably from President Donald Trump's trade wars and from a global slowdown — have become cause for concern. So has an inflation rate that remains chronically below the Fed's target level.

So the Fed has decided that a rate cut now — and possibly one or more additional cuts to follow — could help inoculate the economy against a potential downturn. The idea is that lowering its key short-term rate, which can affect consumer and business loans, could encourage borrowing and spending and energize the economy.

Wall Street has welcomed that prospect. Since the start of the year, the mood of investors has swung decisively from angst about potentially higher rates to elation over the prospect of looser credit. That has helped drive a stock market rally.

Still, skeptics wonder whether Fed rate cuts at this point would really do much to bolster an economy whose borrowing rates are already low. Some even worry that the central bank will be taking a needless risk: By cutting rates now, the Fed is disarming itself of some ammunition it would need in case the economy did slide toward a recession. Some also suggest that by driving rates ever lower, the Fed might be helping to fuel dangerous bubbles in stocks or other risky assets.

Powell will surely be asked about these concerns at a news conference Wednesday after the Fed ends its latest meeting with a policy statement. Reporters will likely also press him about the likelihood of further rate cuts to follow this week's expected move and also whether continued pressure from President Donald Trump to cut rates is damaging the Fed's political independence.

Trump kept up his drumbeat of criticism, complaining in tweets Monday that the Fed raised rates "way too early and way too much" and a small rate cut now "is not enough."

Two government reports last week — on economic growth during the April-June quarter and orders for durable manufactured goods — confirmed that the economy remains on firm footing even with pressures at home and abroad. As a result, some analysts believe the Fed may pause after Wednesday's rate cut to see if the economic outlook further brightens before deciding on any further easing.

Other analysts foresee two or even three rate cuts this year as the Fed tries to counter global threats that risk spreading to the United States — not just prolonged trade rifts but also a potentially botched exit by Britain from the European Union, a weaker China and the risk of a recession in Europe.

The Fed's current rate policy marks the continuation of an abrupt policy shift beginning early this year. In December, the Fed had raised its benchmark rate for the fourth time in 2018 and projected two additional rate increases in 2019. At the time, Powell also suggested that the Fed would keep reducing its bond portfolio indefinitely — a step that would further contribute to higher rates. Stock prices tumbled for days afterward.

In January, Powell and the Fed signaled a sudden policy shift — indicating that they would be "patient" about any changes in rates and implying that rate hikes were off the table.

After U.S.-China trade talks collapsed in May, the Fed went further and began considering acting to sustain the economic expansion, which has just become the longest on record.

Yet now, with U.S.-China trade talks back on track and signs of a resilient U.S. economy, some are wondering why the Fed is considering a rate cut. One theory is that the policymakers have so clearly signaled that a cut is coming that they must follow through on it.

Mark Zandi, chief economist at Moody's Analytics, said he thinks that in the absence of any economic calamity, only one rate cut is likely this year. David Jones, an economist who has written books about the Fed, agrees with that forecast.

"The market is getting ahead of itself in expecting a series of rate cuts," Jones said.

Diane Swonk, chief economist at Grant Thornton, noted that some concern has arisen that the Fed may already be fueling a bubble in stocks that could eventually burst and threaten the economy.

In the meantime, there's little incentive to sell stocks. Indeed, "Don't fight the Fed" is a common saying on Wall Street. To traders, it means riding stocks and other risky investments when the Fed is cutting rates and lightening up on stocks when it's tightening. Low rates mean that bonds pay out less in interest, which makes stocks more attractive by comparison.

Investors often assess a stock's price by how much the company earns. So far this year, investors have gone from paying $14.47 for each $1 in expected earnings per share for S&P 500 companies over the ensuing 12 months to more than $17. That increased willingness has helped S&P 500 index funds surge more than 20% this year — even though earnings for S&P 500 companies were likely down in the first six months of 2019 from year-ago levels.

"We have incredibly low rates, and the Fed is going to be very accommodative," said Craig Hodges, portfolio manager at Hodges Funds. "If anything unforeseen happens, like if tensions escalate worldwide or if the trade talks break down, the Fed is there to have a safety net under us. That gives me a little bit of confidence."

Of course, how much further the stock market has to go is up for debate. The last 19 times the Fed began a rate-cutting cycle in response to slowing growth, dating to the 1950s, the economy eventually slipped into recession in nearly half of them, according to Deutsche Bank. In those recessions, the S&P 500 typically dropped 27% from peak to trough.

If anything, the market rally may increase pressure on companies. Few analysts see the stock market as cheap now that investors are willing to pay so much more relative to corporate profits. For the stock market to make its next move higher, growth in profits may need to lead the way.

___

Choe reported from New York.

  • Associated Categories: U.S. News, Associated Press (AP), AP National News, AP Online National News, Top U.S. News short headlines, AP Business, AP Business - Economy, AP Business - Financial Markets, AP Business - Industries, AP Business - Financial Services
© Copyright 2020 AccessWDUN.com
All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.
Putin foe sent back to jail after suspected poisoning
Russian opposition leader Alexei Navalny has been discharged from hospital even though his physician raised suspicions of a possible poisoning
11:13AM ( 15 minutes ago )
In early fundraising surge, vulnerable House Dems bank cash
Some of the most vulnerable Democratic House incumbents are in strong financial shape for their 2020 campaigns, but there's a long way to go
11:11AM ( 16 minutes ago )
Iraq displays stolen artifacts recovered from UK, Sweden
Iraqi officials display stolen artifacts from the country's rich cultural heritage that were recently recovered from Britain and Sweden
11:11AM ( 16 minutes ago )
Associated Press (AP)
Trump signs Sept. 11 victims' compensation fund extension
President Donald Trump signs bipartisan bill ensuring that a victims' compensation fund related to the Sept. 11 attacks never runs out of money
10:49AM ( 39 minutes ago )
Official names shooter who killed 3 at California festival
Authorities say a shooter cut through a fence and opened fire on a crowd eating and listening to music at a popular food festival in California, killing three people, including a 6-year-old boy
10:43AM ( 45 minutes ago )
The Latest: Trump condemns festival shooter as 'wicked'
President Donald Trump is condemning the "wicked murderer" who opened fire at a California garlic festival, killing three and wounding at least 15 others
10:30AM ( 58 minutes ago )
AP National News
Vulnerable House Dems amass cash, adding to GOP challenge
Some of the most vulnerable Democratic incumbents are in strong financial shape for their 2020 campaigns, but there's a long way to go
6:29AM ( 4 hours ago )
Kamala Harris releases new details of her health care plan
Kamala Harris is filling in the details of how she would move 330 million Americans onto a single government health insurance system
6:02AM ( 5 hours ago )
Coats out as national intel director, clashed with Trump
Coats resigning next month as national intelligence director, often clashed with Trump over Russian election interference
5:59AM ( 5 hours ago )
AP Online National News
The Latest: Band member recounts exchange with shooter
Member of the band Tin Man recounts exchange between shooter, witness
12:30AM ( 10 hours ago )
NYC police seek 2 shooters in Brooklyn playground shooting
Authorities say a popular community festival was coming to a close when gunfire erupted in a Brooklyn neighborhood, leaving one man dead, another person in critical condition and 10 others wounded
10:46PM ( 12 hours ago )
After first steps on moon, crew welcomed home with aloha
Neil Armstrong, Edwin "Buzz" Aldrin and Michael Collins' trip to the moon concluded with a stay in Hawaii
8:03PM ( 15 hours ago )
Top U.S. News short headlines
Pfizer, Mylan strengthen ties, create new company
Pfizer, strengthening ties to Mylan, will pair its off-patent division with the generic drugmaker, creating a new company
10:49AM ( 38 minutes ago )
Financial therapy: What it is and who needs it?
What is 'financial therapy,' and do you need it?
10:25AM ( 1 hour ago )
Pfizer to absorb Mylan, creating generic giant
Pfizer to absorb Mylan, creating generic giant as pharmaceutical sales come under pressure
9:34AM ( 1 hour ago )
AP Business
Global shares fall as market eyes US-China trade talks
Global shares are mostly lower as investors watch for developments in the trade conflict between the U.S. and China, with more talks this week
4:09AM ( 7 hours ago )
Asian shares mostly fall as market eyes US-China trade talks
Asian shares are mostly lower as investors watch for developments in the trade conflict between the U.S. and China, with more talks this week
2:25AM ( 9 hours ago )
Diplomats recommit to saving Iran deal, oppose US sanctions
Diplomats from Iran and five world powers recommitted Sunday to salvaging a major nuclear deal amid mounting tensions between the West and Tehran since the U.S. withdrew from the accord and reimposed sanctions
6:06PM ( 17 hours ago )
AP Business - Economy
Forging history with iron art at Southern Museum
Sparks flew at the Southern Museum of Civil War and Locomotive History on Saturday (July 20) as railroad fans of all ages got to practice an old form of art and design.
12:05AM ( 1 day ago )
US stocks return to records following strong earnings
U.S. stocks pushed to record heights Friday following strong profit reports from Google's parent company, Twitter and other big corporations
4:29PM ( 2 days ago )
Warren warns of economic trouble ahead. Is she right?
Elizabeth Warren is warning that the nation risks an economic downturn, but some economists aren't so sure
2:30PM ( 2 days ago )
AP Business - Financial Markets
The Latest: Iran's Rouhani seeks closer UK ties with Johnson
Iranian President Hassan Rouhani has penned an open letter to Britain's new prime minister, saying he hopes diplomatic ties will be stronger under Boris Johnson's leadership
8:01PM ( 15 hours ago )
The Latest: Iran official says 24 tons of uranium enriched
The head of Iran's Atomic Energy Organization says the country has enriched 24 tons of uranium since its 2015 nuclear deal with world powers
1:27PM ( 22 hours ago )
Biden's full embrace of Obama health law has political risks
Democratic presidential candidate Joe Biden is placing a big bet on expanding the Affordable Care Act, but the approach leaves him subject to attacks from the left, right and middle
12:40PM ( 22 hours ago )
AP Business - Industries
Gold deal ends among European central banks
The European Central Bank says it and 21 other central banks are letting a formal agreement regulating gold sales expire, saying the deal once aimed at stabilizing the market for the precious metal is no longer needed
10:29AM ( 3 days ago )
European Central Bank joins Fed in paving way for stimulus
The European Central Bank has joined the U.S Federal Reserve in making clear that more stimulus could be coming soon to support an economy weakening in the face of global trade tensions
1:15PM ( 3 days ago )
US long-term mortgage rates fall; 30-year average at 3.75%
U.S. long-term mortgage rates fell this week, edging toward three-year lows amid signals from Federal Reserve officials that they could cut their benchmark interest rate at their meeting next week.
1:06PM ( 3 days ago )
AP Business - Financial Services
Putin foe sent back to jail after suspected poisoning
Russian opposition leader Alexei Navalny has been discharged from hospital even though his physician raised suspicions of a possible poisoning
11:13AM ( 15 minutes ago )
In early fundraising surge, vulnerable House Dems bank cash
Some of the most vulnerable Democratic House incumbents are in strong financial shape for their 2020 campaigns, but there's a long way to go
11:11AM ( 17 minutes ago )
Iraq displays stolen artifacts recovered from UK, Sweden
Iraqi officials display stolen artifacts from the country's rich cultural heritage that were recently recovered from Britain and Sweden
11:11AM ( 17 minutes ago )
Hurry up and wait: Docs say insurers increasingly interfere
Doctors worry about the growing influence they see from insurers over patient care
11:07AM ( 21 minutes ago )
Pfizer, Mylan strengthen ties, create new company
Pfizer, strengthening ties to Mylan, will pair its off-patent division with the generic drugmaker, creating a new company
10:49AM ( 38 minutes ago )