The Federal Reserve’s latest twist in monetary policy, reducing the fed funds for a second time in two months and then pausing for instructions has left markets without a clear direction on interest rates.

Equites which would have cheered a 50 basis point cut that no one expected, ended mixed. The Dow shed 52 points closing at 27,094 about 1% below its all-time high.  The S&P 500 was unchanged and at 3006 is just 21 points from its record. The Nasdaq gained 5.49 points to 8,182, about 2% below its historical top.

Treasury yields retreated. The 2-year generic lost 2 points from Wednesday’s close to 1.74% and the 10-year dropped 2 as well to 1.78%.  The spread between the two rates has narrowed to 4 points in the last two days after having finished at 10 points on Friday.


The inversion of this curve for several days in late August, a well-known recession indicator, reversed in early September as US economic statistics suggested that the expansion and job creation remained intact. 

The dollar was mixed, rising against the euro and aussi but losing ground versus the sterling and yen.

After the July 31st FOMC when the bank cut the fed funds rate for the first time in 11 years, citing global and trade risks, markets quickly positioned for three reductions by the December 11th meeting.  For most of last six weeks the futures viewed a decrease at this week’s meeting as a near certainty.  But by Wednesday morning of the odds in the futures market had dropped to 70%.

In the event the Fed proved unwilling to disappoint market expectations which had been building for weeks. The potential reaction in the equity and credit markets if the FOMC had declined to reduce rates was enough to bolster the relatively weak economic case for a cut.

The assessment of the futures that the economic scenario for lower rates had faltered was accurate, even if it did not pertain specifically to Wednesday’s rate decision.  It fitted the Fed’s new set of economic and rate projections.  The central tendency for the fed funds had become 1.9% through the end of next year. In other words, based on their own economic projections, the governors   envisioned no rate changes for the next 15 months.  

Market can be forgiven for befuddlement at the Fed’s next move.


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