U.S. stocks slid Wednesday after the Federal Reserve cut its benchmark interest rate for the first time in more than a decade, but came up short in promising still-easier monetary policy in the near-term, as some investors had hoped.
Here were the main moves in the market, as of the end of regular equity trading:
The Federal Reserve announced it was cutting key borrowing costs by 25 basis points, to a new target band of between 2.00% and 2.25%. A rate cut of this magnitude had been widely expected by market participants in the weeks leading up to the Fed decision.
Equity markets slid shortly after the Fed decision, with the S&P 500 and Dow posting their biggest intraday drawdowns since May. The Nasdaq fell by the most since June 3. Meanwhile, the U.S. dollar index jumped to the highest level in more than two years.
The Fed cited “implications of global developments for the economic outlook as well as muted inflation pressures” as cause for the decision. It also left room for – but did not guarantee – further rate cuts in the future, reiterating comments that the central bank would “act as appropriate to sustain the expansion.”
“The Fed reduced the fed funds rate by 25bp at today’s FOMC meeting, but it was arguably a ‘hawkish’ rather than ‘dovish’ cut,” Capital Economics chief U.S. economist Paul Ashworth wrote in a note Wednesday.
“Although most investors correctly anticipated the cut in the fed funds rate to between 2.00% and 2.25%, future prices suggest there were still a few holding out hope of a bigger 50bp reduction,” Ashworth said. “In addition, the statement offered an almost identical assessment of economic conditions to the one issued in June.”
Two Federal Open Market Committee (FOMC) members voted against Wednesday’s decision – Kansas Fed President Esther George and Boston Fed Eric Rosengren. Both preferred to hold rates unchanged. No members of the FOMC favored a more aggressive 50 basis point cut, however, which had been an outcome markets priced in at a more than 20% probability Wednesday morning.
The Fed also announced that it would be ending its balance sheet reduction process August 1, two months ahead of its previously announced end date.
“In aggregate, the decision to conclude the balance sheet runoff a few months early does not have material implications for the broader markets, but it does signal the Fed’s commitment to stay nimble in supporting this now record-long expansion,” Jason Pride, chief investment officer of private wealth for Glenmede Trust Company, wrote in an email.
A trader works as a screen shows Federal Reserve Chairman Jerome Powell's news conference after the U.S. Federal Reserve interest rates announcement on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 31, 2019. REUTERS/Brendan McDermid
A stronger-than-expected June jobs report and second-quarter gross domestic product print have had some market pundits questioning whether easier monetary policy is warranted. However, in the weeks leading up to the meeting, Federal Open Market Committee members underscored mounting economic threats and a weakening global backdrop, and noted the ability for central bankers to use “insurance” cuts as part of their toolkit to keep the domestic economy chugging along.
Plus, recent reports on core personal consumption expenditures (PCE) – the Fed’s preferred inflation measure – have come in below expectations and below the Fed’s 2% target, signaling weak inflationary pressures and leaving room for the central bank to cut rates to stimulate borrowing and spending.
The Fed did not produce an updated dot plot, or chart showing FOMC members’ projections for future rates, in Wednesday’s release. However, Fed Chair Jerome Powell said during a press conference that a trend toward further rate cuts “is not what we are seeing now.”
Earlier in the session, the three major indices got a boost as shares of Apple (AAPL) held onto gains following stronger-than-expected second-quarter results late Tuesday. S&P 500 component General Electric (GE), meanwhile, posted better-than-expected second-quarter results, stemmed some of its free cash outflow, and posted strong full-year guidance. Shares turned around and fell, however, as investors considered the company’s quarterly net loss and distance still to go in its ongoing turnaround plan.
Meanwhile, new data on the domestic labor market also came in strongly on Wednesday, with ADP/Moody’s reporting a better-than-expected 156,000 private payroll additions in July. June’s private payrolls were also upwardly revised by 10,000 to 112,000. The print, while a historically imprecise gauge of the Bureau of Labor Statistics’ “official” jobs report, points to potential outperformance in the BLS’s monthly report released Friday.
Elsewhere, U.S. Treasury Secretary Steven Mnuchin, Trade Representative Robert Lighthizer and their Chinese counterparts wrapped up two days of meetings in Shanghai on Wednesday, the first in-person encounter between the two sides since May.
The round of talks reportedly comprised a working dinner on Tuesday before a half-day of negotiations Wednesday, and generated few headlines. The two sides are set to meet again in September for further negotiations, according to China’s Ministry of Commerce.
This week’s meeting came after President Donald Trump launched a fresh Twitter attack on China, suggesting the country continues “to rip off” the U.S. and that negotiators “always change the deal in the end to their benefit.”
