Fed cuts rates for first time since 2008
NEW YORK (July 31) - The Federal Reserve cut interest rates on Wednesday for the first time since 2008, citing concerns about the global economy and muted U.S. inflation, and signaled a readiness to lower borrowing costs further if needed.
HIGHLIGHTS:
** Fed cuts target interest rate 25 basis points to 2.00-2.25%, citing implications of global developments for the U.S. economic outlook and muted inflation pressures
** Fed vote in favor of policy was 8:2, George and Rosengren dissented
** Fed says it will conclude reduction of its aggregate security holdings in August, two months earlier than previously indicated
** Fed says rate cut supports committee’s view that sustained economic expansion, strong labor market and near-target inflation are the most likely outcomes but uncertainties remain
** Fed says lowers interest on excess reserves rate to 2.10%
MARKET REACTION:
STOCKS: U.S. stocks hold nearly flat after the announcement, with the S&P 500 .SPXlast off 0.17%. BONDS: The 10-year U.S. Treasury note US10YT=RR yield slipped to 2.0161% and the 2-year yield US2YT=RR rose to 1.8380%.
FOREX: The dollar index .DXY added to slight gains and was up about 0.26%.
COMMENTS:
ERIC DONOVAN, MANAGING DIRECTOR, OTC FX, INTEREST RATES, INTL FCSTONE
“I can’t believe the 10-year is within a one basis point range in the last 15 minutes. There is essentially no reaction. You heard a lot of people saying a quarter-point was priced in. That’s the wrong way to look at it, but suffice to say this was exactly what the market was expecting and this is what the market got.
“This is the most dissent we’ve had in the current Fed; we had two hawkish dissenters on this decision. The outcome is a little bit more hawkish than what people were thinking going in. For the most part, on a scale of 1 to 5, with 1 being very dovish and 5 being very hawkish, this is a 3 or 4. This is a little bit more hawkish than what the market was really expecting, not by a large margin, but it certainly leaves the door open for a one and done.
“The market gets what it wants, as we continue to see more data coming, the Fed is not laid the groundwork for additional cuts in the near future.”
TOM HAINLIN, GLOBAL INVESTMENT STRATEGIST, U.S. BANK’S ASCENT PRIVATE WEALTH MANAGEMENT GROUP, MINNEAPOLIS
“The people were looking for a couple of things - would they actually do the 25 (basis point cut), which they did. It was right in the middle of what everybody was expecting. They kept the language in about being data-driven and that leaves the door open for cuts. So you have like 2-3 cuts in 2019 and one more in 2020; that is the outcome the market has priced in and nothing changed that narrative today. They got the 25 (basis point) cut, they got the commentary and statement, they have to continue to evaluate data, that inflation is running below 2%, that global risks remain out there.”
“They have left the door open so now they will have to sit and assess probabilities of additional rate cuts throughout the year based on how the data comes in. That should have more volatility around FOMC meetings, because if you priced in two more cuts and there are only so many meetings left before the end of the year that pressure will likely build as the year unfolds.”
MICHAEL ANTONELLI, MARKET STRATEGIST, ROBERT W. BAIRD, MILWAUKEE
“Everybody knew there was a 25 basis point cut happening. That was priced into the market. Maybe the camp who wanted 50 basis points are disappointed and that caused the initial sell off.”
“Once the press conference begins we could get all sorts of movement. The statement said uncertainties on their outlook would remain and they would act as appropriate. That could mean they’re ready to cut again this year but maybe the press conference will give us a little more insight.”
Reuters
