· Fed Chairman Powell says rate move was a ‘midcycle adjustment,’ hinting more cuts not a guarantee
The Federal Reserve lowered its benchmark rate by a quarter point Wednesday as an insurance policy not against what’s wrong with the economy now, but what could go wrong in the future. It was the first rate cut by the central bank in more than a decade.
Amid President Donald Trump’s intense political pressure and persistent market expectations, the policymaking Federal Open Market Committee dropped the target for its overnight lending rate to a range of 2% to 2.25%, or 25 basis points from the previous level.
In approving the cut, the FOMC cited “implications of global developments for the economic outlook as well as muted inflation pressures.” The committee called the current state of growth “moderate” and the labor market “strong,” but decided to loosen policy anyway.
The stock market dove later in the afternoon when Fed Chair Jerome Powell noted that the cut was simply a “midcycle adjustment” and that the committee did not see the type of marked economic weakness that would necessitate a longer rate-cutting cycle.
The Fed also left the door open to future cuts, saying it will “act as appropriate to sustain the expansion” as it continues to evaluate the incoming data.
· The two words from Jerome Powell that rocked the financial markets
Stocks cratered, the dollar hit a more than two-year high and bond yields ripped higher after Fed Chairman Jerome Powell suggested that policymakers were not embarking on a new cycle of rate cutting, after it trimmed the fed funds rate by a quarter point Wednesday.
Markets have been on tenterhooks, once expecting three rate hikes this year, and then an easy Fed policy stance, even as the economy has been showing signs of improvement. But the Fed has been facing the unusual task of explaining why it was cutting rates in the face of stronger economic data.
Traders said there was disappointment with the Fed’s statement, which was perceived more as neutral than dovish, but when Powell later said during a press briefing that the Fed’s action was a “midcycle adjustment to policy” that sent markets reeling.
“I think by that it means he doesn’t necessarily mean more cuts are coming, maybe not necessarily one off but not indicative of more aggressive cuts,” said Ben Jeffery, a fixed income strategist at BMO.
Powell later explained, during his press conference, that he meant that the Fed was not embarking on a long rate-cutting cycle, as in a recession. He also described a Fed policy transition that began after it raised rates for the last time in December, then paused and then moved forward to cut rates by a quarter point. The fed funds rate range is now 2 to 2.25%.
“Let me be clear: What I said was it’s not the beginning of a long series of rate cuts,” Powell said. “I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that. Not seeing us in that place. You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.”
Ward McCarthy, Jefferies chief financial economist, said Powell did not make a strong case for the cut where he described once “boiling” trade issues as now “simmering.” The cut was also met by two dissenters, from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George.
BMO’s Jeffery said fed funds futures are now reflecting slower rate cutting by the Fed. In the fed funds futures, there is a 60% chance of a 25 basis cut for September, but a 100% chance of the next quarter point by November.
“It was a very confusing and muddled message, and I don’t think that Powell delivered clear direction for what the near term path of additional Fed easing will be, and I think that’s why the market reacted negatively,” said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.
· President Donald Trump tweeted later in the day that he was disappointed with the rate cut and Powell “let us down,” but added that at least the Fed ended its quantitative tightening program.
· The dollar index hit a two-year high on Wednesday as the Federal Reserve cut interest rates after Fed Chairman Jerome Powell said the 25-basis-point cut was not the same as the beginning of a lengthy rate cutting cycle.
The dollar index rose 0.42% to 98.46 in afternoon trading, its highest level since May 2017 when the dollar index hit a high of 98.891.
Some were expecting the Fed to leave the door open for further cuts or even a 50 basis point cut after Wednesday’s meeting, so the less dovish stance sent U.S. stocks to session lows and the dollar index to a more than two-year high.
Against the euro the dollar was 0.4% stronger, last at $1.111, its strongest level since May 2017.
The yen stood just off three-week lows against the dollar after the Bank of Japan refrained from expanding stimulus, though it committed itself to doing so “without hesitation” if required.
The pound, which has tumbled this week as investors rushed to factor in the growing possibility of Britain leaving the European Union without transition trade arrangements in place, firmed 0.59% to $1.222, crawling back from a 28-month trough of $1.212 plumbed on Tuesday.
· U.S. government debt yields whipsawed on Wednesday after Federal Reserve Chair Jerome Powell said that the central bank’s quarter-point rate cut was simply a mid-cycle “adjustment.”
At around 4:04 p.m. ET, the yield on the benchmark 10-year Treasury note, a benchmark for auto loans, mortgages and other lending, settled lower to trade at 2.013%. The 2-year Treasury yield, more sensitive to changes in Fed policy, rose 2 basis points to 1.872%. Bond yields move inversely to prices.
· The U.S. and China will resume trade negotiations in Washington in early September after the two countries discussed increasing Chinese purchases of U.S. agricultural products in the latest talks in Shanghai.
The two sides conducted “frank, efficient and constructive in-depth exchanges” on major economic and trade issues, and they discussed China increasing its purchase of American farm goods and the U.S. creating “favorable conditions” for it, Chinese state-run media Xinhua said Wednesday, adding that the next round of “high-level” talks will convene in the U.S. in September.
· Euro zone economic growth halved in the April-June period and inflation slowed sharply in July even though the unemployment rate fell to its lowest in 11 years, data from the European Union’s statistics office showed on Wednesday.
Eurostat’s preliminary flash estimate of gross domestic product growth in the 19 countries sharing the euro showed the economy expanding 0.2 percent quarter-on-quarter, down from 0.4% in the previous three months, as expected by economists.
· Oil prices rose for a fifth day on Wednesday following a larger-than-expected drop in U.S. inventories and after the Federal Reserve cut U.S. interest rates for the first time in more than a decade.
The front-month Brent crude futures contract, which expired Wednesday, rose 45 cents to settle at $65.17 a barrel. Brent posted a monthly decline of 2.1%.
U.S. West Texas Intermediate (WTI) crude futures gained 53 cents to settle at $58.58 a barrel, and inched up 0.2% in July.
U.S. crude stockpiles fell for a seventh straight week, slumping 8.5 million barrels last week, the Energy Information Administration said, far exceeding analysts’ expectations for a decrease of 2.6 million barrels.
At 436.5 million barrels, U.S. crude inventories, not including strategic oil reserves, were at the five year average for this time of year, the EIA said.
Reference: CNBC, Reuters
Thai
Eng