October 30, 2019 / 10:54 PM / 23 days ago

Stock investors see silver lining in Fed's rate-cut pause

NEW YORK, Oct 30 (Reuters) - The U.S. Federal Reserve may be done cutting interest rates but stock investors are not done buying.

The central bank on Wednesday cut rates for the third time this year, as expected, but signaled its rate-cut cycle might be at a pause. Investors, however, found enough in the central bank's message to power the benchmark S&P 500 Index 0.3% higher to close at a fresh record.

"It's the willingness of the Fed to indicate continued flexibility," said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

"They said they remain open to what the data shows them. Flexibility is what the market wants to see," said Meckler.

In lowering its policy rate the U.S. central bank dropped a previous reference in its policy statement that it "will act as appropriate" to sustain the economic expansion - language that was considered a sign of future rate cuts.

"The language and the policy change was as expected," said Michael Purves, chief executive at Tallbacken Capital Advisors in New York. "It's an affirmation that the equity and credit markets have been arguably more right than the bond market. The bond market seems to have been predicting much more dire economic conditions."

Amid financial market volatility, the interest rates on some long-dated government bonds recently slipped below the level for short-term debt, causing a so-called "inverted yield curve," widely viewed as a recession indicator.

In late May, yields on 3-month Treasury bills began to exceed yields paid by 10-year Treasury bonds. The yield curve returned to normal on Oct. 11, although historically a re-steepening after an inversion has not meant the economy is out of the woods.

U.S. stocks have been sensitive to the central bank's stance toward interest rates. Weakness in the market late last year amid growing worries about global growth and trade tensions was at least part of the driver behind the Fed's abrupt pivot from a tightening stance to delivering three interest rate cuts this year.

On Wednesday, investors found much to cheer in the Fed's assessment of the economy.

Risks relating to global trade, as well as to the prospect that Britain would crash out of the European Union, have moved in a "positive direction" since the Fed's last meeting, Powell said, adding that the U.S. economy has remained resilient.

Powell also said the Fed does not currently see large financial imbalances or asset bubbles, another comforting message for investors worried about stock valuations.

Stocks were also taking heart from some bullish signs: U.S. economic growth slowed less than expected in the third quarter as a further contraction in business investment was offset by resilient consumer spending, further allaying financial market fears of a recession.

The recent easing of tensions between Washington and Beijing has also helped support risk sentiment.

To be sure, though, many stock investors still seem to be counting on the Fed to ride to the rescue if the decade-long bull market shows signs of cracking.

"If the market slows down in anticipation of an economic slowdown, will the Fed respond and keep lowering rates? My sense is that they probably will," said Jack Ablin, chief investment officer at Cresset Wealth Advisors in Chicago.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Megan Davies and Sinead Carew in New York and Noel Randewich in San Francisco; editing by Megan Davies and Tom Brown

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