This morning, AEST, the Fed cut interest rates by an outsized 0.5%, leading to an initial 375-point surge by the Dow, which subsequently reversed, leaving the old index down over 100 points. Traders initially embraced the large rate cut, though it did raise concerns that the Fed was trying to get ahead of potential economic weakness. We should remember that credit markets were already pricing a 65% chance of such an aggressive move. Comments from the Fed focused on inflation first and foremost, but they are conscious of a slowing economy:
• “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,”
The Fed are comfortable that inflation is under control, and in the ensuing press conference, Jerome Powell was balanced around the economy: “I don’t see anything in the economy right now that suggests that the likelihood … of a downturn is elevated,” said Powell. However, stocks faltered as they got their anticipated sugar hit, but latched onto commentary that implied we shouldn’t get used to this size of cut.
