October 31, 2019 / 11:04 AM / 16 days ago

RPT-GRAPHIC-Are the Fed's rate cuts helping? Have a look

 (Repeats with no change in content)
    By Jonnelle Marte and Dan Burns
    NEW YORK/WASHINGTON, Oct 31 (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
    "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
    Indeed, there is evidence that Powell and his colleagues are
not tooting their own horns without some justification.
    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: 
    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. 
    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. 
    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.
    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.
    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.
    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.

 (Reporting by Jonnelle Marte and Dan Burns; Editing by Peter
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