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- “It is like trying to kill a mosquito with an anvil” – How Fed disappointed Wall Street
"It is like trying to kill a mosquito with an anvil" - How Fed disappointed Wall Street
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Loading...The Federal Reserve cut its borrowing costs on Wednesday for the first time since the 2008 financial crisis, which was expected and reflected in months in the financial markets.
But shares fell sharply after the central bank announced it would lower its base rate by a quarter percentage point to its target range of 2% to 2.25%. Wall Street sentiment ignited after Fed President Jerome Powell lowered expectations for further relief, saying Wednesday was not the start of a "long series of interest cuts."
Each of the major indices in the US has dropped by more than 1%, with the Dow Jones Industrial Average and S&P 500 suffering their worst daily losses since May. The dollar jumped against its competitors as bond yields plummeted.
Here's what Wall Street says about the solution.
Regarding market reaction:
"Reducing or increasing the percentage of the US Federal Reserve's policy is often like trying to kill an anvil mosquito; work can be done, but the effect is always widespread and sure to cause turmoil. FOMC seeks to provide an impediment to the rapidly deteriorating global economic environment that is likely to spill over into the US economy and stifle inflation. "-Joseph Brusuelas, RSM Chief Economist
"And this is how aggressive it looks (Hawkish) ... The minimal amount of cuts, disagreements and press conferences of Powell have disappointed the markets and undermined our expectations. guidelines for future policy action. ”-Ellen Zentner, Morgan Stanley
It was a strange market reaction, but these were strange times and Powell was trying to thread a very narrow needle. He wanted to signal that the economy was weakening, but not too weak. What the market heard was that the Fed was cutting, but not cutting enough. Ironically, if Powell signals deeper cuts, it may raise concerns that the economy is much weaker than current data. -Christopher Smart, Chief Global Strategist and Head of the Barings Investment Institute
Regarding inflation and employment:
"Jerome Powell is aware of global disincentives for the path of America - no matter the tariffs." -Konstantinos Venetis, Senior Economist at TS Lombard
The change comes at a time when US unemployment is near its lowest level since the 1960s and lending conditions are already adjustable based on the Fed's National Branch of Financial Conditions. Anticipating a significant deterioration in economic prospects, we expect the Fed to apply at most another 25 bps cutback and then stay on hold until the end of 2020. -Mark Haefele, UBS Chief Global Investment Officer
On the next action of the central bank
Financial markets continue to expect that further easing will be needed to protect growth, and two or three additional cuts of 25bps are still expected after the end of 2020 by the end of 2020. We think this is excessive given the relative the resilience of the US economy and recent evidence suggesting that inflation may go to the bottom. -Mark Haefele, Chief Global Investment Officer at UBS
Markets are still expecting another fall in the fall, but the actual timetable will depend on the data between now and then. On the one hand, strong jobs or production numbers could lead to expectations of recovery at a much higher rate. On the other hand, further easing by the European Central Bank or renewed trade tensions with China could lead to further reductions. Christopher Smart, Chief Global Strategist and Head of the Barings Investment Institute
About dollars and bonds
Fed aggression may support the US dollar, but we argue that caution will follow. The strength of the dollar exacerbates the problems that most affect the Fed - global growth, trade and inflation. The more cautious the Fed is about cutting interest rates, the greater the likelihood of financial conditions tightening, making future interest rate reductions more likely. Thus, we argue that the greater the appreciation of the US dollar, the greater the subsequent fall in the dollar. -Ellen Zentner, Morgan Stanley
The Fed stopped its quantitative tightening operations two months earlier, in August rather than October. In plain English, they will no longer be a net bond seller, an action that previously put a slight strain on bond yields and is a form of monetary tightening. -Eric Lascelles, Chief Economist at RBC Global Asset Management
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