Today the Federal Reserve’s Open Market Committee cut the Fed’s benchmark interest rate by 25 basis points. That’s pretty much what the financial markets had been expecting–although a sizable minority of investors and traders had been hoping for a deeper cut of 50 basis points.
Stocks fell, not so much on the results of the meeting itself but on “clarifying” remarks from Federal Reserve chair Jerome Powell. At his post-meeting press conference Powell said, “Let me be clear. It’s not the beginning on a long series of rate cuts. I didn’t say it’s just one [cut] or anything like that,” he added. “It’s appropriate to adjust monetary policy to a somewhat more accommodative stance.”
On those remarks stocks fell. The Standard & Poor’s 500 index dropped from 3010.81 at 2:35 p.m. Washington time to 2959.84 at 2:53. The Dow Jones Industrial Average fell from 27167 as 2:34 p.m. to 26,796 last 2:52. That’s a loss of 1.8%.
And this drop came even though the Fed also announced that it would stop selling Treasury bonds and mortgage-backed assets from its $3.8 trillion portfolio on August 1, two months earlier than expected. Fed selling from its balance sheet reduces the money supply. Ending the sales two months earlier than expected is equivalent to an interest rate cut and adds more stimulus to the economy.
So why the selling on Powell’s comments? My read is that with stocks at record highs Wall Street is casting around for reasons to believe prices could go higher. The rally has priced in two or three interest rate cuts in 2019 so Powell’s remarks that this cut isn’t the beginning of a long series of cuts acts to remove that catalyst for higher share prices. This statement on the Fed’s intentions could well change if President Trump’s two nominees for open seats on the central bank are confirmed. Both favor driving interest rates significantly lower from even today’s levels.
On the other hand, the decision today drew dissents from Eric Rosengren, president of the Boston Fed, and Esther George, president of the Kansas City Fed . Both argued for leaving rates unchanged in the face of 50-year lows in unemployment and strong consumer spending.. Even if Trump’s two Fed candidates are seated, today’s dissents may signal that we’re a fairly lengthy debate about cutting interest rates further.
The yield on the 10-year Treasury fell to 2.02% this afternoon, a drop of 4 basis points. The yield on the 2-year Treasury climbed to 1.89%, slightly above the narrow 1.85% to $1.86% that 2-year yields have inhabited recently.