Quick Bite – US Fed Cuts Rates, but Cautions About Future Cuts
The Federal Reserve cut US interest rates by 0.25% on Wednesday, but warned a further reduction this year was not a “foregone conclusion” as a government shutdown clouds the outlook.
Concerns about weak job growth coupled with signs of funding tightness in money markets prompted the Fed’s move to halt efforts to shrink its balance sheet, starting in December.
Wednesday’s decision to lower the benchmark rate to a range of 3.75%-4.00% drew dissent on the 12-member Federal Open Market Committee, casting doubt on the central bank’s strategy at its next meeting in December.
Source: Trading Economics
Fed Chair Jay Powell said, “A further reduction of the policy rate at the December meeting is not a foregone conclusion… I always say that it’s a fact that we don’t make decisions in advance. But I’m saying something in addition here: that it’s not to be seen as a foregone conclusion — in fact far from it.”
Shares on Wall St fell on Powell’s comments but recovered later in the session, with the S&P 500 ending the day flat. Rate-sensitive 2 year Treasury yields climbed to 3.6%, up 0.11%. Markets had bet on the prospect of another quarter-point cut this year, pricing in an 87% chance of another move in December ahead of Powell’s remarks. The odds of a cut fell to 74% after his comments.
Source: WSJ
Some FOMC participants are probably concerned that easier monetary policy is increasing financial instability. They probably don’t want to “feed the animal spirits” in the stock market. This comes at a time of record all time highs in markets – with AI champion chipmaker Nvidia becoming the first $5 trillion company in history.
Source: WSJ
The reaction of the bond market should certainly give Fed officials pause. The 10 year Treasury bond yield rose over 4.00% to 4.08%. That’s where it was before the Fed cut the Fed Funds Rate on 17 September. The bond market apparently does not agree with the Fed that interest rates were too restrictive.
Source: Yardeni Research
Coming a day after the RBA and the Australian market was shocked by the latest CPI print, it is possible that the central bank trend of cutting rates is fast coming to an end. Whether that spooks investors in the already expensive market remains to be seen.