WASHINGTON. We’re back today, as we promised in our earlier article. As widely expected, Federal Reserve Chair Powell and the Fed’s Open Market Committee (FOMC) announced a 0.25 percent interest rate cut Wednesday afternoon. Hard to believe, but it’s the first Fed rate cut in 11 years.
Market averages, which had hovered around the zero line up to that point, took about half an hour to digest this non-news. Good news, right? Wrong. Suddenly, investors, funds, machines, everyone and everything appeared to bail out of stocks in unison. Stocks and market averages crashed, with the Dow Jones Industrials off a nasty 450 points at its current worst.
Perhaps Mr Market and his irritated investors wondered at that point if the Fed’s damage to the Great Trump Rally might prove permanent anyway.
First Fed rate cut in 11 years: Good news is bad?
Stocks are trying to return to some semblance of normal as we write this report just after 3 p.m. ET. The Dow currently stands at around 26900, off roughly 300 points (-1.1 percent) on the day and beginning to sink once again. The S&P 500 is down 26 points for a 0.83 percent loss, and the tech-heavy NASDAQ is getting bombed, off nearly 0.90 percent (-70.5 points).
But don’t take these numbers completely to heart. They continue to gyrate wildly and it’s anyone’s guess where this unexpectedly nasty day will end.
But what about the Fed’s even better — and more surprising — news?
Rather puzzling is the fact that the Fed not only announced the 0.25 percent rate rollback. The nation’s central bank also announced – in Fedspeak, of course – that it would terminate its current deflationary bond buyback program at the end of August instead of its somewhat later September-October time frame announced earlier. Here’s the Fed’s bafflegab, according to this snippet from CNBC.
“The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.”
Had that program remained on track, the 0.25 percent cut would have essentially proved meaningless.
ZeroHedge grumbles after hearing the news
More cynical than CNBC (which is hard to imagine), the Two Tylers over at ZeroHedge were a bit more negative on Powell and the Fed.
“Just over eight months since Fed Chair Powell panicked and pivoted as global stocks (and bond yields) tumbled, the flip-flop is complete as The Fed has cut rates (by 25bps) for the first time since Dec 2008 (and cut the IOER to 2.1% from 2.35%).
“Additionally, the Fed ends the normalization of the balance sheet two months ahead of schedule.
“‘In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent….’
“Why is the market anxious in front of this Fed rate cut? @FundStrat points out ‘Consider this fact: – the average portfolio manager has 8.7 yrs experience per Morningstar, which means running portfolio only since 2010 – half of fund managers NEVER SEEN A RATE CUT IN THEIR PROFESSIONAL CAREER!!’”
Intermission: Late Wednesday update
Buried in today’s Fed announcement was a bit of unnecessary churlishness, which we only noticed after we posted our original text here. The Fed indicated it would never respond to politics and today’s rate cut was just a midcourse “adjustment.” It’s a lot of BS, and the Fed was just covering its derrière for its massive 2018 faux pas. The Fed screwed up. They’re trying to fix it now. But in a way that covers their collective tushes and doesn’t look like caving to the White House.
It’s a typical kind of response in this nation’s increasingly nasty, amoral capital city. Bad stuff never happense. But “mistakes were made.” And it’s likely that this Fed CYA move is what tanked today’s markets when people finally noticed it.
Always expect the unexpected
Good point, guys. As I noted in my previous article today, I’ve spent approximately 40 years in hand-to-hand combat with Mr Market. In the mid-00s, I bought an investment house but financed it with a 7-year-fixed, then floating rate mortgage, fearing that an unusually nasty housing crunch might happen soon. And boy, was I right.
Unfortunately, I was too right, as we all found ourselves right smack in the middle of the Great Recession in record time. 7-years at a locked-in low rate saved me from the worst of things, but the greatest irony was to come. The first year that mortgage rate began to float, it actually got cut to just over 2 percent per annum. And more or less stayed there for years before the rate began to float up recently toward previous reality.
I relate this anecdote because, although I’d prepared for something more than usually negative, given my level of experience, I grossly underestimated the depth and severity of the Great Recession and its aftermath. Other houses, financed at higher fixed rates did not do as well as the one I just mentioned. That’s because things turned out to be the reverse of everything I knew – namely, that floating rate mortgages ALWAYS float up after the fixed period ends.
Not this time. Who knew?
Caution is the watchword. Between an amateur-hour Fed and the Chi-coms, things are getting tricky
Which is why those younger money managers the Tylers are dissing might want to be careful here, as they’ve never seen the Fed try to dig its way out of a near-depression to resume an interest rate “normalcy” we may never see again.
Government indebtedness, and personal indebtedness for that matter, long ago exceeded common sense. Whether anyone knows it or not, our current monetary system is flirting with life-support. That’s why the Fed itself has to learn to avoid overreacting as they did once Powell took the central bank helm.
And that’s to some extent why traders and investors (and high-speed machines and algorithms) are having a big hissy fit Wednesday afternoon. They’ll take the piddling 0.25 percent interest rate reduction, which is better than nothing. But they’d have jump-started a much-needed rally if they’d seen a 0.50 percent increase, as Innovative Income Investor guru Tim McPartland tartly observed this afternoon.
“Everyone knows this [rate cut] will happen–no cut would send stocks tumbling, while a 1/2% cut would send stocks to the moon. Fed Chair Powell already is going to have to do a mea culpa for raising rates in December, so the last thing he wants to do is send stocks sharply higher or lower.
“The press conference–the global economy will be blamed for the ‘change of heart’ by Powell–there is no other reason.”
Which is pretty much what Powell did.
Famous last words
Powell should have listened to President Trump to begin with. But in official Washington, Orange Man Bad. So this miserable Wednesday afternoon on Wall Street is the current result. Let’s pray that this nasty little crash doesn’t turn into the kind of late-summer swoon we’ve often experienced in recent trading memory.
— Headline image: Wile E. Coyote (and Wall Street) look like they’re in trouble again. (Fair use in satirical rework of
Wile E. Coyote image. Character copyright: Warner Brothers.)