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The Federal Reserve and Two Words that Rocked Financial Markets, Our Views

The Federal Reserve and Two Words that Rocked Financial Markets, Our Views

Many market participants were expecting Fed Chairman Jerome Powell to send a dovish tone to markets but with only two words, changed global investor expectations for 2019 and 2020. Powell calls the cut a “midcycle adjustment” and describes it as the latest move in a policy transition that started with the last hike at the end of last year according to CNBC, in a piece attributed to Patti Domm.

As a result stocks fell, the US dollar reached a two year high and bond yields ripped higher after this comment by the Chair. Now the Fed did trim rates by a quarter point on Wednesday, and while the markets were on tinterhooks, waiting for a dovish comment, the “midcycle adjustment” phrase sent a mini shock wave around the globe. Traders were disappointed with the Fed statement but when Powell made that comment, those two words sent markets reeling.

“Let me be clear: What I said was it is not the beginning of a long series of rate cuts,” Powell said.

Our Views: This comment places President Trump in a unique situation in that the US economy is solid and moving forward. What it does for Trump is it gives him another boost when talking to China, so look for more confrontations with President Xi. Also, this comment from the Fed Chair points to more confidence and a US interest rate policy that clearly seems to be working. The Fed will be making adjustments in a strong economy – now GDP at 2.1% – for the next year to two years and likely without a recession. Overall this is positive for the US.

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