What we covered here today:
- Stocks: Markets ended mixed after the Fed cut rates.
- The Fed lowered interest rates by a quarter percentage point.
- FedEx is on track for the worst daily drop since 2008.
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What’s moving markets today: September 18, 2019
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Why Fed independence matters
1:33
• Source:
CNN Business
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Jay Powell opens the door to start growing the Fed’s balance sheet
Federal Reserve Chairman Jerome Powell on Wednesday said the US central bank may need to increase the size of its balance sheet to relieve stress in the overnight lending market.
“It is certainly possible we will need to resume the organic growth of the balance sheet sooner than we thought,” Powell told reporters during a press conference.
After overnight lending rates spiked this week, the New York Federal Reserve pumped $128 billion into the market on Tuesday and Wednesday.
Wall Street firms have been predicting the Fed will need to take a further step by increasing the size of the balance sheet. In other words, the Fed will need to start buying bonds again.
“We’ll call it QE-lite,” said Jim Bianco, CEO of Bianco Research, referring to the Fed’s crisis-era bond buying program known as quantitative easing. “Functionally it looks exactly the same, but they are doing it for a different reason: To provide liquidity.”
UBS notes that the Fed’s balance sheet always grew prior to the crisis, in line with the growth of currency. The firm expected it would happen again, just not until early 2020.
The spike in overnight lending rates this week shows the Fed may have underestimated how much cash is needed to keep the financial system operating smoothly.
Powell acknowledged there is “real uncertainty” around this question and said the Fed will “learn quite a lot in the next six weeks” about the appropriate level of reserves.
Stocks finish mixed after Fed cut rates
US stocks finished mixed on Wednesday, after the Federal Reserve cut interest rates by a quarter percentage point for a second time in a row.
Stocks spent most of the day in the red and fell to their session lows following the Fed decision. While opinions on the Federal Open Market Committee differed, the average Fed forecast doesn’t account for any further rate cuts this year.
- The Dow closed 0.1%, or 37 points, higher.
- The S&P 500 finished little changed in positive territory.
- The Nasdaq Composite closed down 0.1%
FedEx (FDX) was the worst performer in the S&P, closing nearly 13% lower and recording its worst day since December 2008. The company reported worse than expected earnings and lowered its outlook late Tuesday.
Powell: I don't think we'd do negative interest rates
If the economy weakens more, the Fed is prepared to be “aggressive,” Fed Chair Jerome Powell said at a press conference today.
Does that mean the United States would drop rates into negative territory like much of Europe? Don’t count on it.
“Negative interest rates is something we looked at during the financial crisis and decided not to do,” Powell noted. “If we decided to find ourselves at the lower bound again, I think we should use large-scale asset purchases. I do not think we would look at negative rates.”
The Fed bought trillions of dollars of Treasuries and other assets during the Great Recession as it took rates to near zero. That helped end the recession and sparked the longest economic expansion in history.
Powell noted Europe’s negative rates are pulling down US Treasury yields. The high integration of global capital markets is to blame for that. The low rates in Europe and Japan are a symptom of slowing global growth, Powell added.
Dow slides as much as 200 points as Powell speaks
After an initially muted reaction, stocks extended their losses as the Federal Reserve’s press conference got under way.
At its worst, the Dow was more than 200 points lower.
As the press conference concluded, the Dow was down 60 points, or 0.2%. The S&P 500 is 0.3% down and the Nasdaq Composite is 0.5% lower.
'I'm not concerned' about boosting market liquidity this week, Powell says
Investors kept a keen eye on the New York Federal Reserve’s liquidity boost today and yesterday, but Fed Chairman Jerome Powell isn’t concerned.
Liquidity in overnight lending markets was squeezed at the start of this week, amid an oversupply of US Treasury bonds and companies withdrawing cash to pay their quarterly tax bills. The New York Fed spent more than $125 billion in the overnight borrowing markets ensured crucial bank lending is running smoothly.
“We were well aware of tax payments and settlement of large bond payments,” he said. “The response to that was stronger than we expected. I’m not concerned about that.”
Powell said that the liquidity squeeze won’t have implication for the wider US economy.
If the economy takes a turn for the worse, we'll have to cut rates again, says Powell
Is this the last rate cut this year? Or is another one coming?
In his remarks at a press conference today, Fed Chair Jerome Powell said the Fed expects the economy to remain strong and inflation to stay around its 2% target. Another small cut or two might be warranted in the future.
But he doesn’t think the Fed needs to keep cutting for many more months.
For Trump, the Fed's rate cut isn't good enough
Market expectations for a rate cut had fallen in recent days, and still the central bank lowered rates. But this wasn’t good enough for President Donald Trump.
Trump has long been critical of the central bank and its chairman, Jerome Powell, demanding lower rates to boost the economy. Last week, Trump even called for rates of zero or less.
Three Fed members dissent from today's decision
It’s not exactly a civil war in the ranks of the Federal Reserve. But three members of the central bank’s rate-setting Federal Open Market Committee voted against the decision to lower interest rates by a quarter of a percentage point.
Such dissension is highly unusual. In fact, the last time this many members voted against the majority was in September 2016 – when three Fed hawks voted for a rate hike. At the time, the Janet Yellen-led Fed decided to hold rates steady.
Interestingly, two of the Fed members that voted for the increase three years ago – Kansas City Fed chief Esther George and Boston Fed president Eric Rosengren – indicated they would have preferred that the Fed held rates steady this time around. (Cleveland’s Loretta Mester was the other dissenter in 2016 and she too wanted a rate increase back then.)
But at Wednesday’s meeting, the other dissenter didn’t side with George and Rosengren. St. Louis Fed president James Bullard, one of the more dovish members of the FOMC, said he wanted the FOMC to cut rates by a half of a percentage point.
These dissents clearly show that the Fed is just as confused about the state of the US (and global) economy as is the rest of the market.
Inflation pressures remain muted … but the recent spike in oil prices could change that. More tariffs could thrust the economy into recession … but the US and China have each taken steps to ease tensions in the trade war. With that in mind, it’s no surprise that the Fed will need to remain data dependent – even if President Trump keeps complaining about Fed chair Jerome Powell on Twitter. Buckle up!
Dovish but not dovish enough: Why more cuts might not be coming
Lowering interest rates is the very definition of dovish monetary policy. Yet, the Fed’s decision to cut rates by a quarter percentage point wasn’t seen as dovish enough.
This lends more credence to the idea that the central bank is just making a mid-cycle adjustment to its policy, rather than embarking on a new easing cycle.
Powell has so far said as much, stressing that the bank was considering an array of factors in making its decisions.
Stocks hold steady as Fed cuts interest rates again
The market reaction was rather muted to a second interest rate cut in a row by the Federal Reserve.
US stocks briefly pared some of their losses but remained in negative territory.
The Dow is down 75 points, or 0.3%, while the S&P 500 is down 0.4%. The Nasdaq Composite is down 0.7%.
The US dollar, measured by the ICE US Dollar Index, bounced slightly higher. The gauge is up 0.2% at 98.43.
The yield on the 10-year Treasury bond slipped to 1.7526%.
Fed cuts interest rates by a quarter percentage point
The Federal Reserve cut interest rates for the second time in two months amid growing worries about a potential global slowdown.
Officials also left the door open for a further rate cut this year, reinforcing the message by Fed chairman Jerome Powell that policymakers would do whatever necessary to prevent a recession.
The federal funds rate, which controls the cost of mortgages, credit cards and other borrowing, will now hover between 1.75% and 2%.
FedEx on track for worst daily drop since 2008
It’s a brutal day for FedEx (FDX) shareholders. The stock was down more than 13% in midday trading after warning of a weak outlook. That puts FedEx on track for its worst drop since the dog days of the Great Financial Crisis. Shares plunged 14.5% on December 9, 2008.
But the stock has suffered another double-digit percentage drop not that long ago. FedEx plummeted 12% on December 19 of last year too after it first warned that global trade tension was hurting its results.
CEO Fred Smith said Tuesday he was worried that many in the US “were whistling past the graveyard” and ignoring global threats to the American economy. It looks like FedEx investors are painfully aware of those risks though.
The Fed should cut today, and then twice more, strategist says
There’s a “very high likelihood that the Fed will cut today,” Matt Diczok, fixed income strategist at Bank of America, told Paula Newton on CNN Business’ digital live show Markets Now.
And the central banks should keep cutting rates for the next two meetings as well.
“What we’re starting to see is that the global slowdown that started overseas … is finally coming to the US,” he said.
This is what the Fed has been concerned about and its aim is to keep the economic expansion going.
Market liquidity has also been on investors’ minds this week, as the New York Fed injected liquidity into the market twice in the last two days.
But Diczok is less concerned, saying the requirement for Fed liquidity is the result of a technicality. Credit and stock markets didn’t really react to it either, he said.
Following a large issuance of Treasuries and a squeeze of investment reserves, overnight lending rates jumped higher at the start of this week.
Saudi Arabia is the central bank of oil
Why is the attack on Saudi oil production such a big deal, when America has become a huge oil producer and exporter?
“Saudi Arabia is the central bank of oil,” said CNN Business’ own Matt Egan on our digital live show Markets Now.
Although the kingdom calmed nerves and sent oil plummeting yesterday by saying its production was coming back online, Egan noted some reports say a ramp-up will be slow. Saudi oil may only be operating at 90% by the end of the year.
If the Fed doesn't cut, the market will tank
The Federal Reserve’s interest rate decision is due soon and expectations for a quarter percentage point cut are at 70%, according to the CME FedWatch Tool.
But if the Fed doesn’t budge today, the market will tank, said Alan Valdes, senior partner at Silverbear Capital on the CNN Business digital live show Markets Now.
Valdes expects a cut today, one more in October and another one before year-end. But Fed Chairman Jerome Powell is unlikely to telegraph further details, he said.
“A lot depends on inflation, a lot depends on consumer confidence, which has been weaker,” Valdes added.
Consumers are the backbone of the American economy, but of late, worries about the US-China trade war have been seeping into consumers’ minds.
Stocks hold losses at midday
US stocks remain soundly in negative territory around midday, with less than two hours to go until the Federal Reserve’s interest rate decision.
The Dow is more than 60 points, or 0.2%, down, while the S&P 500 is 0.3% lower and the Nasdaq Composite is down 0.4%.
Two-thirds of Dow stocks are in the red, led by Caterpillar (CAT), 3M (MMM) and Walgreens Boots Alliance (WBA), according to Refintiv.
In the S&P, FedEx (FDX) is the biggest loser by far, down more than 13% following worse than expected earnings.
Oil prices remain lower. US oil futures are down 1.8% at $58.30 a barrel, while the international benchmark Brent crude is down 1.3% at $63.73 per barrel.
Fed can breathe sigh of relief about the yield curve
Remember when everyone was panicking about the inverted yield curve? That’s when the rate on the 2-Year US Treasury was higher than the 10-Year. That’s often happened before a recession.
But the curve has since returned to somewhat more normal conditions, with the 10-Year yielding about 1.76% – higher than the 2-Year yield of 1.68%. That’s a good sign, according to Wilmington Trust chief economist Luke Tilley.
Tilley said in an interview with CNN Business before the Fed announcement Wednesday that “the yield curve had been screaming for a rate cut” when it was inverted. There were even calls not that long ago for the Fed to possibly slash short-term rates by a half of a percentage point to restore balance to the bond market universe.
But Tilley said the yield curve “looks a lot less scary” now. And that’s a big reason why he thinks the Fed may cut rates today, once more this year and just once in 2020 before pausing.
In fact, Tilley believes there is now little chance of a recession next year…unless the trade truce between the US and China ends and the threat of even more tariffs come into play.
CEOs are less optimistic about the future
CEOs are less optimistic about the economy in the near term.
According to the Business Roundtable’s third quarter CEO economic outlook index, companies’ plans for capital spending and hiring waned “likely due in part to growing geopolitical uncertainty.”
The surveyed CEOs project 2.3% GDP growth this year, down 0.3% from last quarter’s estimate. The outlook index number also dropped below its historical average.
CEOs are concerned about US trade policy and foreign retaliation, as well as a slowing of the global economy, the Business Roundtable said in a press release.
JPMorgan (JPM) CEO Jamie Dimon said “The US needs strong, sustained long term economic growth in order to remain globally competitive and expand opportunity for more Americans,” according to the Business Roundtable.
Over the past year, more than half of the surveyed company heads also reported trade worries were having a negative impact on sales. One third of CEOs also sad it negatively impacted hiring.
You're not crazy. The markets have been really volatile
Check out the VIX for the past five days …
Why Wall Street is getting nervous about overnight lending
For a second-straight night, banks have sent a clear message to the Federal Reserve: Add more money to America’s financial system.
Banks use the overnight lending market to borrow money to fund short-term purchases, such as US Treasury bonds. The Fed sets the target rate at its board of governors meeting: The rate is currently set between 2% and 2.25%, although it is expected to cut rates by a quarter percentage point later today.
Yet the overnight lending rate shot up to 4% last night and was as high as 10% the night before. Banks were crunched as the Treasury put up a huge number of bonds for sale to fund the government’s massive deficit. At the same time, banks needed short-term loans to fund their quarterly tax bills, which had just come due.
The New York Fed spent $75 billion last night after putting $53 billion into the market the night before. That calmed nerves, but last night’s rate jump proves the cracks in the financial system aren’t going away with a snap of the fingers.
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