Fed Seen Downshifting to Half-Point Hike in December

Oct 27 (Reuters) - The Federal Reserve is seen backing off of its aggressive rate-hike pace starting in December after economic data published Thursday added to evidence that the slowdown that the central bank has sought to engineer is underway.

Traders of futures tied to short-term U.S. interest rates are still betting heavily on the Fed delivering a fourth-straight 75-basis-point rate hike when policymakers meet next week. But rate futures prices now point to a half-point increase at the Fed's December meeting -- bringing the policy rate to a 4.25%-4.5% range -- and no more than a half a point further over the next two meetings.

U.S. economic growth rebounded in the third quarter, data Thursday showed, but the same report showed consumer spending slowed to a 1.4% rate from the prior quarter's 2.0% pace, and the GDP deflator - an estimate of price pressures -- eased to 4.1% from the prior quarter's 9%. A separate report showed new orders for non-defense U.S. capital goods excluding aircraft, seen as a proxy for business spending, unexpectedly fell.

The slowdown in consumer spending is "a good indication that higher interest rates are biting into the pocketbooks of the consumer,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

The Fed has lifted interest rates by a full three percentage points so far this year. Though the housing market has slowed dramatically, evidence of higher interest rates cooling demand in other parts of the economy has been sparse.

Fed policymakers have signaled they will keep raising interest rates to bridle demand in a bid to bring down inflation running far higher than the Fed's 2% target.

Thursday's data suggests the tide may be turning, and more may be ahead.

"Real consumer spending on goods will fall further, services spending will slow, there are signs that business investment is wavering, and the housing market is reeling under the weight of higher mortgage interest rates," wrote Regions' economist Richard Moody. "Moreover, the full impact of higher interest rates has yet to make its way through the economy."