After 3rd Rate Cut Is Fed Pausing or Removing the Punchbowl?

Vito J. Racanelli

Is the punchbowl being removed from the equity party? Will investors have to rely on seltzer now?

Hard to say with certainty, but it at a minimum it seems that the cover is back on the bowl. I’m referring here to an admonition from Federal Reserve Chairman Jerome Powell, who last Wednesday indicated that no more cuts were forthcoming, unless the U.S. economy slowed significantly.

While the Federal Open Market Committee reduced the Fed funds rate by 25 basis points to 1.50%-1.75%, just as the market expected, the bigger news was what the Fed said in its press release and afterwards. There is going to be a pause in the rate cutting trend that has seen 75 bps since the end of 2018.

“The current stance of [interest-rate] policy is likely to remain appropriate” as long as the economy expands moderately and the labor market stays strong,” he said at the press conference after the FOMC meeting ended. And there you have it—or not.

Actually, as JonesTrading chief market strategists Michael O’Rourke points out in a recent report, the key Powell sentence was this: “I think we would need to see a really significant move up in inflation that's persistent before we even consider raising rates to address inflation concerns.”

Inflation? What’s that? I’m being facetious, but the fact that there is little or no inflation to speak of simply means raising rates isn’t going to happen in the foreseeable future. And stocks were off to the races hitting new highs last week. For more on this, see page 1.

As if to drive this home, September’s personal-consumption expenditures (PCE) price index fell a seasonally adjusted 0.01% from August, the weakest reading since January, the Commerce Department said Thursday. Compared to the year ago month the index was up 1.33%, below the Fed’s 2% target.

We also received news that the U.S. GDP grew at an unimpressive 1.9% in the third quarter compared to 2% in 2Q, but that was also higher than the expected 1.6%. The U.S. dollar weakened in the wake of the decision. Seems like we are back to the “Goldilocks” economy of yesteryear, not to hot nor too cold but just right—to avoid rate hikes.

Meanwhile, the New York Fed continues to buy tens of billions a month in short-term Treasury debt to tamp down volatility in money markets, which reverses its campaign to shrink the Fed’s roughly $4 trillion asset portfolio.

So far this Fed chairman has given little indication that it will stick to the data and not bow to the whim of the stock market. Should share prices fall sharply, I’d bet the Fed will start cutting again. Moreover, with negative rates in other developed bond markets, American Treasuries will remain in demand.

The U.S. Treasury 10-yr note yield was around 1.72%, down from 1.80% one week ago.

Upcoming: 12/10-11 - FOMC meeting. Don’t expect much.

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Vito J. Racanelli
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