In line with the slowdown in US economic growth, the Federal Reserve cut interest rates for the third time in a row. What does this measure mean?
The trade war with China and the global economic slowdown continue to take their toll on the United States: according to the Commerce Department, the growth of the Gross Domestic Product in the third quarter was 1.9%, lower than that of the two previous quarters.
The financial market was already taking a slowdown for granted, but a greater contraction in business investment was offset by stability in household spending and meant that the negative impact of economic activity was less than expected by analysts.
“Today's report shows that the economy continues its steady growth defying skeptics who talk of a recession,” Commerce Secretary Wilbur Ross said on Twitter.
Between April and June 2019, the economy had grown at a rate of 2%, while in the first three months of the year it had grown at 3.1%. Even so, GDP is growing within its potential range, which is between 1.7% and 2%.
For President Donald Trump, the figure is good news: “The largest economy in the history of the United States,” he tweeted once the macroeconomic data was known.
End to falling interest rates?
In line with the slowdown in growth, this Wednesday, October 30, the Federal Reserve (FED) also announced a cut in interest rates for the third consecutive time , the main effect of which, in practice, is that it makes credits such as the consumer and mortgage.
The rate was reduced by a quarter of a percentage point (0.25 points) to a range between 1.5% and 1.75%. “Although household spending has risen at a strong pace, business investments and exports remain weak,” the interest-rate-setting committee said in a statement.
However, the US central bank has signaled that it will pause the cycle of rate cuts that began in July, when it lowered borrowing costs for the first time since 2008.
The trade war with China has hit business confidence and there is concern in the market that the consumer will get infected and restrict their spending. But Fed Chairman Jerome Powell doesn't see that risk.
“The companies we talk to in our vast network of contacts report that consumers are doing well and are focused on the good job market and increasing income,” Powell told reporters.
All hopes pinned on a pact with China
If the behavior of the US economy has depended on anything in recent months, it is what happens with China. For this reason, the truce announced by President Trump on the imposition of tariffs in October gave the market a break, which trusts in the prompt signing of an agreement.
However, a trade deal seems far from certain. Sources close to the negotiations cited by Reuters say Trump's demand that Beijing commit to large purchases of US farm products has become a major sticking point in the talks.
The United States is at an unusual juncture. Unemployment is near a 50-year low, inflation is moderate and the economy is growing less, though not as low as the Fed had hoped.
But some sectors of the economy, particularly manufacturing, have faltered in recent months as the global economy slows. And companies have reduced investment in response to the trade war with China.
That's part of why the Fed is cutting rates: In doing so, it hopes to encourage businesses and consumers to energize the economy by borrowing at more affordable rates.