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Author: kltrader   |   Latest post: Tue, 22 Oct 2019, 10:14 AM

 

The Fed Cuts Rates Again by 25 Basis Points

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On Wednesday (18 Sep), the Federal Reserve (the Fed) approved a quarter-point rate cut on its benchmark overnight lending rate to a range of 1.75% to 2% from the previous range of 2% to 2.25%. Major US indices fell on this decision, with the Dow Jones Industrial Average falling as much as 200 points, the S&P 500 sliding as much as 0.8% and the Nasdaq Composite dropping as much as 1.1% (CNBC, 18 Sep).

Wednesday’s Rate Cut

The Fed committee again said that the primary rationale for the cut is “the implications of global developments for the economic outlook as well as muted inflation pressures” (CNBC, 18 Sep). The Fed also said in its statement that US exports have also weakened, underscoring the impact of the US-China trade war on the Fed’s reading of the US economy (Yahoo Finance, 19 Sep).

In addition to this reduction, amid a breakdown this week in the overnight repurchase lending market, the Fed also cut interest it pays on excess reserves by 30 basis points, greater than the funds rate cut (CNBC, 18 Sep).

Meanwhile, US President Donald Trump continued to criticize the Fed, saying the Fed officials are “boneheads” for not paying the “lowest rate” in the world (Yahoo Finance 19 Sep). Trump said that the Fed and its chairman Jerome Powell have “no ‘guts,’ no sense, no vision!” with this decision, which follows a month-long pressure campaign by Trump, who complained that current interest rate level put the US at an economic disadvantage compared to countries with lower rates (CNBC, 19 Sep).

Knee-jerk Reaction for US Stocks

The US market reacted strongly following the announcement, with the Dow Jones Industrial Average falling as much as 200 points before recovering losses, while the S&P 500 slid as much as 0.8% and the Nasdaq Composite loss as much as 1.1% (CNBC, 18 Sep).

US stocks then erased earlier losses over the next few hours to close flat at the end of the day, with the S&P 500 closing at 3,006.7 points (+0.0%) yesterday (18 Sep) after falling to as low as 2,978.6 points.

Source: Macquarie Research - 19 Sept 2019

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