Bloomberg
Markets viewed the Fed as less dovish than hoped, prompting a sell-off.
The Federal Reserve on Wednesday cut its benchmark interest rate by a quarter percentage point, and ended its so-called quantitative tightening program two months early, but managed to disappoint the market by ruling out an aggressive monetary easing campaign.
Instead, Fed Chairman Jerome Powell described the interest rate cut, the first since the 2008 financial crisis, as a “mid-cycle adjustment” that will hopefully get the economy going again.
Pressed by reporters, Powell went further and said he didn't see the cut as the “beginning of a lengthy cutting cycle.”
“The evidence of my eyes tells me that our policy does support -- it supports confidence, it supports economic activity, household and business confidence through channels we understand. It will lower borrowing costs, and it will work,” Powell said.
Markets sensed the Fed was less dovish than hoped as soon as the statement was announced at 2 p.m. but dropped sharply once Powell rejected a large amount of easing.
The Dow Jones Industrial Average DJIA, -1.23% ultimately finished down by 300 points.
This is a mess, but what he is trying to say is that this isn’t beginning of a long cycle but it isn’t necessarily one and done. Basically, this was the insurance, nothing else decided.
— Tim Duy (@TimDuy) July 31, 2019
In its statement, the policy-setting Federal Open Market Committee said it was easing monetary policy “in light of the implications of global developments for the economic outlook and well as muted inflation pressures.” Analysts say uncertainty about President Donald Trump’s trade fight with China is causing companies around the world to pull back on investments.
Language in the statement seemed to step back from promising a rate cut in September. Fed officials removed urgent language from the statement that said it was “closely” monitoring the data.
Hot take: I read this as a neutral to slightly hawkish 25 cut, which is basically between (1) and (2) below. Not good for front end, not good for risk in the short term.
Awaiting the presser. https://t.co/nzQxDzxiHq
— Guy LeBas (@lebas_janney) July 31, 2019
In the end, the FOMC said it “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”
The Fed statement was generally upbeat about the economy, saying that job gains have been “solid” and growth was occurring at a moderate rate.
Economists generally expect the Fed to trim its benchmark interest rate once more this year. The bond market thinks the Fed will ultimately be more aggressive in easing monetary policy, and has three quarter-point cuts priced in by the end of the year.
It would be rare for the Fed to engineer a “one-and-done” rate increase, said Jan Hatzius, chief economist at Goldman Sachs, in an interview with MarketWatch.
There were two dissents to the Fed rate-cut decision by members of the Federal Open Market Committee which sets policy.
Both Kansas City Fed President Esther George and Boston Fed President Eric Rosengren wanted the central bank to hold interest rates steady.
Powell said he wasn’t worried about the risks that low interest rates could increase financial instability and lead to a crisis.
“If you look overall, financial stability vulnerabilities are moderate,” he said.
The Fed also said it was ending the program to shrink its balance sheet, known as quantitative tightening, on Aug. 1. That is two months earlier than planned. Economists said it will be important for the Fed to soon start buying Treasurys in the open market as mortgage related assets roll off its balance sheet to provide some stability to the market.
President Trump had been urging the Fed to cut its benchmark rate by a half-percentage point. At the same time, the president may be pleased that the Fed has stopped shrinking its balance sheet. While Fed officials have discounted the program’s impact on the economy, saying it was like “watching paint dry,” the president has long argued that the program was dampening economic growth.
See: Here’s how the stock market tends to perform after a Fed rate cut
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