The Federal Reserve cut rates by 25 basis points on Wednesday, causing benchmark Treasury yields like the 10-year Treasury note to plummet to settle at 2.013 percent once the capital markets digested the news.
“There were two components to success: One was to get the dollar weaker and the other was two get the yield curve steeper. They failed on both measures,” said Jim Caron, Managing Director of Global Fixed Income at Morgan Stanley Investment Management.
“I think the result is that they’re going to cut another 25 basis points again in September, so we’re really talking about semantics,” he added. “What we have to really contend with is that a strong dollar makes you miss on inflation all the more.”
In a post-rate adjustment press conference, Fed Chair Jerome Powell couldn’t quell the market angst on Wednesday after the Dow Jones Industrial Average fell as much as 400 points. For the markets hoping that future rate cuts could be on the way, Powell dashed their hopes by saying it wasn’t the trend, but merely a “mid-cycle adjustment.”
“That refers back to other times when the FOMC has cut rates in the middle of a cycle and I’m contrasting it there with the beginning of a lengthy cutting cycle. That is not what we’re seeing now, that’s not our perspective now,” Powell said. “You have to look at not just the 25 basis-point cut, but look at the committee’s actions over the year.”
“We started off [the year]expecting some rate increases. We then moved to a patient setting for a few months and now we’ve moved here,” Powell added. “As we’ve moved to more accommodative policy, the economy has actually performed as expected with that gradual increase in support.”
The markets may have already priced in a rate cut, leading to sell-offs following news of the cut. Additionally, the cut acknowledges that the central bank is aware of the looming risks in the economy.
The news of the rate cut comes after the U.S. economy added 170,000 nonfarm payrolls and the unemployment rate currently stands at a low 3.7 percent. The Commerce Department recently reported that Gross domestic product (GDP) fell during the second quarter to 2.1 percent, but still bested Wall Street analysts who were expecting a larger decline. GDP fell from 3.1 percent in the first quarter, which represents the weakest increase since the first quarter of 2017.
The central bank cited “implications of global developments for the economic outlook as well as muted inflation pressures.” The Fed also said it would “act as appropriate to sustain the expansion,” which meant that future rate cuts could take place.