Fed. Likely to Approve a Third Consecutive Rate Reduction at Meeting this Week

Matty-Sways

When Federal Reserve officials meet this week they are expected to drop interested rates for a 3rd straight time.

When Federal Reserve officials meet this week they are expected to drop interested rates for a 3rd straight time and will consider whether to signal a timeout on additional cuts in part because of the improvements they have seen so far.

“Insurance cuts are working,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “When you dig into the details, the effect has been quite notable.”

Morgan Stanley found that over the six months through August consumer spending on interest-sensitive durable goods rose 14.6%. Contributions from durable-goods spending have accounted for 40% of the gains in consumer spending over those six months, up from 16% of the monthly increases last year.

Applications for mortgages to purchase homes are up nearly 9% this month from a year earlier, after declining 2% last November from a year earlier. The average 30-year mortgage rate has fallen this month to 4% from a recent high of 5.2% last November.

“I know there’s a lot of questions about upcoming potential recession and things like that. Our customers don’t seem to be viewing it that way,” said Stuart Miller, executive chairman of home builder Lennar Corp. , on a call with analysts earlier this month.

Sales of newly constructed homes are up more than 7% for the January-to-September period after rising less than 1% last year, according to the Commerce Department.

“It will come as no surprise…when I say that” interest rates have been “the catalyst for this most recent rise in housing demand,” said Ryan Marshall, chief executive of PulteGroup Inc., on an earnings call last week. The Atlanta-based home builder reported its highest third-quarter order volumes since 2006.

When the Fed changes its benchmark rate, currently between 1.75% and 2%, it will have a significant effect on financial conditions, including stocks, long-term interest rates and corporate bonds.

The Fed has delivered “the ultimate soft landing for the housing market,” said Jim Klinge, a real-estate agent in Carlsbad, Calif.

“If you are thinking about buying a home, that drop in rates is very important,” said Brian Wickert, president of Accunet Mortgage in Waukesha, Wis. “But the drop in rates has been gobbled up by the increases in price caused by higher demand and lower inventories.”

The reductions in interest rates fought these rising costs in housing. "It was excellent in terms of the numbers,” said Ms. Matera. She said her monthly mortgage payment is about one-third less than what she had been paying in rent for the prior three years.

“The current growth backdrop is more fragile because there’s only so much lift easier monetary policy can give,” said Ms. Zentner of Morgan Stanley. “More certainty is the only thing that can provide a more lasting lift on the business-investment side.”

Other executives echoed her sentiments.

“I don’t really feel like we’ve seen the cost of capital go down any,” said Dan Eberhart, chief executive of oil-field services company Canary LLC, which relies heavily on imported products from China. “A clear and resolute end to the trade war would make the clouds go away tomorrow,” he said.

Caterpillar Inc., a maker of construction and mining equipment, last week cut its profit forecast for the year, citing global economic uncertainty that had led customers to pull back on big purchases.

“Our sense is that customers are just far more cautious than they were certainly a year ago but even 90 days ago,” said Rafael Lizardi, finance chief at chip maker Texas Instruments Inc., on an earnings call last week. 

“When there’s tension in trade and obstacles to trade, what do businesses do? They become more cautious and they pull back,” said Mr. Lizardi. “We are at the very end of a long supply chain, and when the ones at the very front pull back, it becomes a traffic jam.”

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