On Wednesday, Wall Street got something it had demanded for months — an interest rate cut from the Federal Reserve.
Nonetheless, investors greeted the central bank’s quarter percentage-point cut with a mix of skepticism and open hostility. The Fed’s decision to mete out an “insurance policy” cut to guard against a deeper downturn actually sent markets reeling, with the S&P 500 (^GSPC), Dow (^DJI) and Nasdaq (^IXIC) all tumbling in the wake of the decision.
Some thought the rate cut seemingly fired the starting pistol on a new easing cycle, but that idea was squelched by Fed chief Jerome Powell.
The central bank is navigating multiple shoals, including muted inflation, an economy that’s still firing on most cylinders, political pressure from Washington, and the need to preserve policy options in the event of a deeper downturn. The mix of conflicting impulses led economists to sharply question the Fed’s motives.
‘Kudos to the Trump economics team’
One of the most vocal was MUFG-Union Bank economist Chris Rupkey, who hammered the FOMC for cutting interest rates with unemployment so low and the economy still growing.
Rupkey blasted the central bank for bowing to pressure from President Donald Trump, who’s harshly criticized Fed policy while agitating openly for lower rates.
“Kudos to the Trump economics team for getting the president's view across and Fed officials to act on it,” Rupkey said, adding sarcastically: “What's next, return to the gold standard?”
Calling the rate cut “unwise,” Rupkey likened the rate cut to a medieval medical treatment -- and warned investors may yet rue the decision.
“The Fed's decision today is like in the days when doctors bled their patients to heal them,” Rupkey said.
“I think they are probably proud of themselves, but they should really be more ashamed. The Federal Reserve threw away their independence today and with each future rate cut they will gradually eliminate their relevance to the economy forever,” he added.
‘Still wary from the last recession’
Wall Street’s reaction partly reflected disappointment in what some economists thought might be a 50 basis point cut, or at least the opening shot of several more cuts to come. However, the selloff intensified after Powell hinted that Wednesday’s decision was not necessarily the beginning of a trend.
The mixed message underscored the tricky balance the Fed is negotiating as it tries to manage market expectations in the context of a dual mandate of containing inflation and unemployment. It’s something some observers characterize as a “third mandate” that might come back to haunt policymakers if things get worse.
"Central bankers are still wary from the last recession,” in a way that’s prompting them to preemptively ease policy, noted Candice Bangsund, a portfolio manager at Fiera Capital, which has more than $108 billion in assets.
“To be talking about four more rate cuts through 2020 ... seems unjustified, given the sound economic backdrop,” Bangsund added.
While the Fed has indicated they're willing to let the economy "run hot ... there's a longer-term concern about getting back on track. We need to get rates higher so when the next recession comes along we have some ammunition," she said.
Under normal circumstances, the Fed would be aiming to prop up a soft jobs market or slower growth. While the economy has slowed, consumer spending is healthy, growth is above 2% and unemployment remains comfortably below 4%, suggesting near-full employment.
“Some Fed officials have also offered an ‘insurance’ rationale for today’s cut, although the case for ‘insurance’ seems somewhat less compelling,” said John Bellows, a portfolio manager at Western Asset.
Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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