Fed Cuts Interest Rates but Jerome Powell Sends the Market a Confusing Message
The Fed cut interest rates by a quarter point as was expected by nearly everyone Wednesday. But then Fed Chair Jay Powell sent a confusing message as to what will happen next.
The market’s initial reaction to the FOMC policy announcement was mild. However, when Powell commented that this cut was not the start of a lengthy cutting cycle, the market suffered its worst negative reversal of the year.
The market has been expecting a number of cuts over the next several months and this seemed to be a shift in the Fed’s plans. Powell then tried to clarify this by saying, “Let me be clear, I didn’t say it’s just one, just not a long easing cycle.” It is unclear what “long” means in this context and whether the market was incorrectly anticipating the level of future cuts.
Powell has had problems clearly communicating in the past and it would not be surprising to see some clarifications for Fed members in the near future. For now, the market is disappointed. Powell simply didn’t deliver what it wanted.
There was a good-sized bounce after the aggressive dip but the dollar flew higher on the news, bonds rallied and gold dropped sharply.
The issue now is whether this selling is going to gain some traction. There will likely be a negative reaction overseas and the big problem is that there really aren’t any major potential catalysts on the radar as we head into the dog days of summer. The Apple (AAPL) earnings report has already been forgotten and now we no longer have the anticipation of anther Fed announcement for a while. Even the China trade issue is back on hold until September.
Addition caution is warranted while the market tries to sort things out.
Have a good evening. I’ll see you Thursday.