Powell aces tricky Fed transition to ending interest rate cuts, doing ‘100% the right things’

Stock Market

Federal Reserve Chairman Jerome Powell holds a news conference following a closed two-day Federal Open Market Committee meeting in Washington, September 18, 2019.

Sarah Silbiger | Reuters

Stocks were slightly lower and bond yields were near lows of the day after the Fed signaled a pause when it said it would move to “assess” its interest rate policy, rather than “act as appropriate” to adjust rates.

The Fed cut interest rates by a quarter point, as expected, and removed language from its statement, saying it would “act as appropriate” to sustain the recovery. It now says it “will assess the appropriate path of the target range” for fed funds.

The rate cut was its third in so many meetings, and many market pros had expected the Fed to finalize its rate cutting with this last cut to 1.50% to 1.75%. The Fed is now indicating it will base its decision on future developments.

“This is a pretty text book hawkish cut with that remove of “act as appropriate,” said Ben Jeffrey, rate strategist at BMO.

The 10-year yield was at 1.79%, slightly below where it was before the 2 p.m. announcement. Treasury yields initially rose on the news but backed off again. The bond market has been expecting a hawkish announcement. Stocks were initially lower but moved slightly higher.

“I think they gave the market what they wanted. They got the rate cut but they also got the signal that the Fed was going to pause and the bar for further action is moving higher,” said Drew Matus, chief market strategist at MetLife Investment Management. “They sound like parents talking to kids. Last time, it was ‘we’re going to have dessert’ and this time it’s ‘we’ll see after you eat your dinner.'”

John Briggs, head of strategy at NatWest Markets said the bond market was already anticipating a hawkish comment, and the move was more a flattening, meaning shorter duration yields moved less than longer duration yields. The distance btween the 2-year yield and the 10-year narrowed. The 2-year was at 1.63% after the Fed statement.

“If it continues to flatten, the market is saying you may not want to cut rates, but we may need more rate cuts,” Briggs said. “If we continue to flatten, the market is saying we probably need more rate cuts.”

Flattening sometimes precedes an inversion. When the yield inverts, meaning the 2-year would rise above the 10-year, that could signal recession.

Fed Chairman Jerome Powell was to speak at 2:30 p.m. ET at a press briefing, and he is expected to answer questions on the future policy path, the economy and also the Fed’s activity in the short-term lending market.

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