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- The Federal Reserve slashed borrowing costs Wednesday for the first time since the 2008 financial crisis, a move that has been priced into financial markets for months. But stocks fell sharply following the announcement.
- The mood on Wall Street soured after Fed Chairman Jay Powell dimmed expectations for additional easing, dispelling the idea that Wednesday was the start of a “long series of rate cuts.”
- Here’s what Wall Street is saying about the decision.
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The Federal Reserve slashed borrowing costs Wednesday for the first time since the 2008 financial crisis, a move that has been priced into financial markets for months.
But stocks fell sharply after the central bank announced it would lower its benchmark interest rate by a quarter percentage point to target range of between 2% and 2.25%. The mood on Wall Street soured after Fed Chairman Jay Powell dimmed expectations for additional easing, saying Wednesday wasn’t the start of a “long series of rate cuts.”
The major US indices each shed more than 1%, with the Dow Jones Industrial Average and S&P 500 suffering their worst daily losses since May. The dollar jumped against a basket of peers, while Treasury yields fell.
Here’s what Wall Street is saying about the decision.
On the market reaction
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“Reductions or increases in the U.S. Federal Reserve’s policy rate are often like trying to kill a mosquito with an anvil; it may get the job done but the fallout is always widespread and sure to cause a commotion. So it is with today’s rate cut as the Federal Reserve Open Market Committee sought to provide a cushion to a rapidly deteriorating global economic environment that will likely spill over into the U.S. economy and muted inflation.” -Joseph Brusuelas, chief economist at RSM
“And That’s What a Hawkish Cut Looks Like … The minimal size of the cut, the dissents, and Powell’s press conference disappointed markets, and undercut our expectation. Powell’s statement that the cut was ‘in the nature of a mid-cycle adjustment to policy’ provided little dovish guidance for future policy moves.” -Ellen Zentner, Morgan Stanley
It was strange market reaction, but these are strange times and Powell was trying to thread a very narrow needle. He wanted to signal that the economy is weakening, but not weakening too much. What the market heard was that the Fed is cutting, but is not cutting enough. Ironically, had Powell signaled deeper cuts, it might have triggered concerns that the economy is much weaker than the current data. -Christopher Smart, chief global strategist and head of the Barings Investment Institute
On inflation and employment
AP/John Minchillo
“Fed Chair Jay Powell is cognizant of the global disinflationary impulses heading America’s way – never mind tariffs.” -Konstantinos Venetis, senior economist at TS Lombard
The shift comes at a time when US unemployment is close to its lowest level since the 1960s, and credit conditions are already accommodative, based on the National Financial Conditions Index from the Chicago Fed. Barring a marked deterioration in the economic outlook, we expect the Fed to implement at most one more 25bps cut and then to remain on hold through the end of 2020. -Mark Haefele, global chief investment officer at UBS
On the next adjustment
Reuters
Financial markets continue to expect that further easing will be necessary to protect growth, and after today’s move are still pricing in two or three additional 25bps rate cuts by the end of 2020. We believe this is excessive, given the relative resilience of the US economy to-date and recent evidence that suggests inflation may be bottoming out. -Mark Haefele, global chief investment officer at UBS
Markets still expect another cut in the fall, but the actual timing will depend on the data between now and then. On the one hand, strong jobs or manufacturing numbers could lead expectations to reset to a much higher rate path. On the other hand, further easing by the European Central Bank or renewed trade tensions with China could lead markets to price in further cuts. -Christopher Smart, chief global strategist and head of the Barings Investment Institute
Powell was clear that the Fed does not see today’s cut as the beginning of a cutting cycle. If the Fed returns to data dependence, based on our forecast, they will not cut again. -Seth Carpenter, chief economist at UBS
I think for now that the base case is no cut in September but a balance of risks and an inflation outlook that argue for easing thereafter. Paradoxically, today’s press conference and the associated financial market response make additional easing likely later in the year. -Eric Winograd, senior US economist at AllianceBernstein
On the balance sheet
AP Photo/Andrew Harnik
Powell downplayed any significance of the end of the balance sheet unwind. The Fed modelling of the balance sheet would imply that the two months of less unwind would have almost no discernible effect on the economy. -Seth Carpenter, chief economist at UBS
The committee decided to halt the process of reducing the size of its balance sheet starting tomorrow, two months earlier than previously indicated. In aggregate, the decision to conclude the balance sheet runoff a few months early does not have material implications for the broader markets, but it does signal the Fed’s commitment to stay nimble in supporting this now record-long expansion. -The investment strategy team at Glenmede Trust Company
On the dollar and Treasurys
AP Photo/Mark Lennihan
Fed hawkishness may give the USD a bid, but we argue for caution. USD strength exacerbates the issues that concern the Fed the most – global growth, trade, and inflation. The more cautious the Fed is on rate cuts, the higher the probability that financial conditions tighten, making future rate cuts more likely. We thus argue that the higher the USD rally, the bigger the subsequent USD decline. -Ellen Zentner, Morgan Stanley
The Fed is stopping its quantitative tightening operations two months early, as of August rather than October. In plain English, it will no longer be a net seller of bonds – an action that had previously exerted a slight upward pressure on bond yields and represented a form of monetary tightening. -Eric Lascelles, chief economist at RBC Global Asset Management
