Happy Halloween

The last week of October is likely to be an eventful one. Halloween is on Thursday, the last day of the month, and Major League Baseball will crown a new World Series champion. And, oh yes, the Federal Reserve will hold its next-to-last monetary policy meeting this year, at which it is expected to continue on its path of easing monetary policy in the face of not-so-terrible economic news that doesn’t appear to warrant another interest rate cut.

The Fed meeting begins on Tuesday and culminates on Wednesday afternoon at 2:00 EST, with a likely announcement that it is cutting its federal funds rate by 25 basis points for the third time in as many meetings. The Fed hasn’t cut rates this often since the financial crisis when the world economy and financial markets looked like the world was coming to an end. Now we’re looking at the U.S. economy weakening from about a 3% annual growth rate to about 2%, and the Fed is acting like its 2008 again.

Of course, the Fed may not be looking to do another rate cut for economic reasons, but because it has pretty much painted itself into a corner by practically promising the markets that yet another rate cut is coming. What would the market’s reaction be if the Fed decides on Wednesday to leave rates unchanged? No doubt it would be ugly, which is why I’m siding with the consensus market view that the Fed will indeed lower rates this week, whether it’s “data-driven” or not.

Speaking of data, there will be a lot of it this week, both before and after the Fed meeting.

On Wednesday morning, just a few hours before the Fed meeting ends and announces its rate decision, the Commerce Department will provide its first estimate of third-quarter U.S. GDP. The regional Fed banks in New York and Atlanta are calling for the report to show an annualized growth rate in the 1.8% to 1.9% range, which would be slightly weaker than the 2% rate in the second quarter and the first quarter’s 3.1% rate.

On Thursday, Commerce will report personal income and outlays for September, which will be watched closely to see if it corroborates the retail sales report from earlier this month, which showed an unexpected 0.3% drop after August’s 0.3% gain was revised upward to a 0.6% increase. The market had been expecting another 0.3% rise in September after climbing six months in a row. Should personal spending – a broader category than retail sales – come in similarly underwhelming, that might be cause for concern because the American consumer seems to be moving along blithely oblivious to all the chatter about an upcoming recession.

On Friday, the jobs report for October will be released. In September the economy added another 136,000 jobs while the unemployment rate fell to 3.5%, down from 3.7% in August to its lowest rate since December 1969.

Also, on Friday, the widely watched manufacturing index from the Institute for Supply Management for October will be announced, which might overshadow the employment report depending on what it shows. In September the index came in at 47.8, keeping it in contraction territory (i.e., under 50) for the second straight month.

The decline in this index, while worrisome, is overblown. Let’s not forget that the manufacturing sector only accounts for about 10% of the U.S. economy. The services sector, which accounts for much of the rest (i.e., the vast majority of economic activity) is still well into expansion mode (if, admittedly, on the downtrend). The ISM nonmanufacturing index gets released next week.

While I understand the Fed’s knee-jerk instinct to lower interest rates at the first sign of economic weakness, there’s no particular reason to believe that continually lowering already-low interest rates will provide any new economic stimulus. Indeed, there are other factors – the tariff war with China, for example – that are keeping a lid on growth, not that interest rates are too high. Then again, manipulating interest rates, either directly or indirectly, are about the Fed’s only weapons, but if they’re unlikely to work, why bother using them?

We only have to look at the record of Mario Draghi, Fed chair Jerome Powell’s opposite number at the European Central Bank, whose eight-year tenure ends this week, to see the futility in that.

Draghi has presided over years of not just low rates but actual negative interest rates, which don’t seem to have budged the eurozone economy out of the funk it’s been in since the global financial crisis over 10 years ago. One of his last acts as ECB president was to lower rates further into negative territory while adding yet another round of bond buying at its September meeting.

While the Fed appears hell-bent on following that example, let’s hope it doesn’t get to the point where negative rates in the U.S. aren’t just a bad dream but economic reality.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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