Words from Jerome Powell that Rocked the Financial Markets

Stocks cratered, the dollar hit a more than two-year bond and high yields ripped higher after Fed Chairman Jerome Powell indicated that policymakers weren’t embarking on a new cycle of rate cutting, after it trimmed the fed funds rate by a quarter point Wednesday.

Markets have been on tenterhooks, after anticipating three rate hikes this year, and then a simple Fed policy stance, even as the economy has been showing signs of improvement. However, the Fed has been confronting the unusual job of explaining why it had been cutting prices in the face of stronger economic data.

Traders said there was disappointment with the Fed’s announcement, which was perceived more as impartial than dovish, but when Powell later said during a media briefing that the Fed’s action was a”midcycle modification to policy” that sent markets reeling.

“I believe it means he does not necessarily mean more cuts are coming, not one off but not indicative of more aggressive cuts,” stated Ben Jeffery, a fixed income strategist at BMO.

Powell later clarified, during his press conference, he supposed that the Fed wasn’t embarking on a lengthy rate-cutting cycle, as in a recession. He also explained a Fed policy transition which started after it raised rates for the last time in December, then paused and then moved forward to reduce rates by a quarter point. The fed funds rate range is currently 2 to 2.25%.

“Let me be clear: What I said was it is not the start of a long series of rate reductions,” Powell said. “I did not say it is just one or something like that. When you consider rate-cutting cycles, they go on for quite a very long time and the committee isn’t seeing that. Not seeing us in this place. You’d do that if you watched actual financial weakness and you believed that the federal funds rate required to be cut a lot. That’s not what we are seeing.”

Ward McCarthy, Jefferies chief financial economist, said Powell didn’t make a strong case for the cut described once”boiling” trade issues as now”simmering.” The cut was also fulfilled by two dissenters, from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George.

“The position isn’t well enunciated. The policy statement was ambiguous and he has not done anything to describe it,” McCarthy said. “He seems like he is not confident. My take is they are concerned about downside risks. Since they have already taken the measure [to cut prices ], they will likely take another, but his remarks and the two dissents suggest this isn’t the start of a major easing cycle and that is what hammered the marketplace.”

BMO’s Jeffery said fed funds futures are currently reflecting slower rate cutting by the Fed. In the fed funds futures, there’s a 60% chance of a 25 basis cut for September, but a 100% likelihood of the next quarter stage by November.

“I do not believe it achieved anything,” McCarthy said. “It may temporarily satiate market expectations, but the price action indicated the reverse, and you know it is not likely to satiate the White House Twitter accounts. I believe that the Fed has put itself in a really awkward position. It might not easily defend itself, and that is what we’re getting from Powell.”

The response from the bond market was one of confusion, and strategists were searching for Fed officials to clarify the message in coming days.

“It was a really confusing and muddled message, and I don’t believe Powell delivered clear direction for what the near term path of further Fed easing will be, and I believe that is why the market responded negatively,” said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.

The Dow dropped up to 478 points and finished down 333 points in its worst day since May. The 2-year Treasury yield, most representing the Fed’s policy, went on a wild trip to over 1.95percent from a low of 1.79% prior to the Fed statement.

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