As I reviewed the Fed’s meeting and interest rate cut from last week, I kept asking myself: Did the markets overreact? On the flip side, was Fed Chair Powell being vague, evasive or acting out in frustration? Sure, the markets might have misinterpreted his statement following the meeting, but it still led to a steep drop in the indices.
It was likely a tough Federal Open Market Committee (FOMC) meeting. I can only imagine the debates over a new policy directive. Two FOMC members voted against the rate cut, so Powell must have been frustrated. He did not have consensus from his members.
Did the markets overreact to the interest rate cut?
During the post-meeting press conference, markets remained relatively stable-to-moderately lower. However, when Powell mentioned a “mid-cycle adjustment” – I still don’t know what that vague term means – the sellers swooped in. Markets dropped like a ton of bricks. The forward momentum that pushed the SPX 500 over 3,000 was crushed by a single phrase.
Was that statement another “shoot first, ask questions later” blunder? Clearly the FOMC gave the markets what they wanted, and Chair Powell did not tip his hand to future rate cuts. But this reminded me of his trouble at the podium last December.
To refresh your memory, Powell said the economy will continue to grow in 2019, but the Fed is going to continue with its intended interest rate cuts. The markets went into a deep dive following that seemingly contradictory statement until he finally clarified himself on January 4. That’s when he said the Fed will remain flexible on its policy, and the markets stabilized.
I bet we’ll see a repeat of that performance at the Jackson Hole Economic Symposium in a few weeks. After Chair Powell reviews his dismal performance, he will offer up something more palatable to the audience. His statement might be something for the bulls to hang their hat on.
So where does that leave future rate cuts? The Fed Funds Futures currently sports a 56% chance of a rate cut in September, far less than before last week’s meeting. With softer economic data, the Fed might build in a full cut before long.