As widely expected, The Federal Reserve cut its target federal funds rate by ¼ point, the first rate cut since 2008. Fed Chairman Jerome Powell, indicated that the cut was a preemptive strike against the economic uncertainty that has affected American businesses due to the unresolved trade tensions between China and the U.S.
Many investors were hoping for more, a 50 basis point cut and a commitment by the Fed for additional rate cuts in the future. Investors didn’t take kindly to the Fed’s one and done posture and stocks fell. The S&P 500 ended down 32.80 points, or 1.1%, to 2980.38, ending a 36-session run in which the closing index didn’t move 1% in either direction. Doubts about future rate cuts also sent the yield on the 10-year Treasury note to 2.034%.
Many investors had wished Powell had been more solicitous of their preferences for continued support for the market, undoubtedly, so that some, could switch into more risky asset classes — a familiar pattern that has been a staple of this unbroken ten-year bull market.
There is risk in Powell’s preemptive strategy. If the Fed ends up overshooting the mark and the economy remains vibrant, what happens if inflation starts to slowly creep up, or unemployment rises?
The Fed has very little room to play with. This is the financial state of affairs in Europe, after a decade of easy money led to negative interest rates — a condition that still prevails today. The Fed needs to be careful lest the U.S. follows the same path and runs the risk of a potential deflationary environment.