Closed Federal Reserve rate cut lifts stocks — as it happened

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC

FT live blog begins at 1pm ET / 6pm BST.

What to expect from the Federal Reserve today

Welcome to the FT’s live blog of the Federal Reserve’s rate decision.

The Fed appears poised to lower its benchmark interest rate for the second time this year, after cutting rates in July for the first time since the 2008 financial crisis amid trade uncertainty and global economic challenges.

Strategists at JPMorgan believe the Fed’s statement will stick with language saying the policy committee “will act as appropriate to sustain the expansion”, noting that any changes could send the market a hawkish signal.

Investors also will be glued to policymakers’ outlook for the federal funds rate, known as the dot plot, as well as their economic forecasts.

The Fed will publish its statement at 2pm EST, followed by a press conference with chair Jay Powell at 2:30pm EST.

The FT’s Brendan Greeley and Colby Smith have a breakdown of five things to watch today, which you can read here.

And stay tuned to our live blog for continued coverage of the Fed.

Less than an hour out from the Fed’s decision, US stocks are in the red and Treasuries are rallying

Here’s where the major gauges sit:

☻ S&P 500, down 0.4 per cent. Utilities are the only sector in the black, while energy is worst off, down 0.9 per cent.
☻ Nasdaq Composite, down 0.6 per cent
☻ Dow Jones Industrial Average, down 0.3 per cent

In bond land, Treasury yields are lower:

☻ 10-year, down 6.7 basis points at 1.7474 per cent
☻ 2-year, down 5.7bp at 1.6799 per cent

The US dollar index is up 0.1 per cent at 98.328.

Investors betting on another rate cut

The market is pricing in a quarter-point rate cut by the Fed today, based on the latest figures from CME Group.

The FedWatch Tool, which tracks federal funds futures, shows that investors have placed 70.4 per cent odds on a 25-basis point cut, with zero chance of a larger half-point cut:

One month ago, investors saw 22.3 per cent odds of a 50-basis point cut.

Fed rate of 1% ‘could be the new zero’

The Federal Reserve can only go so far in cutting rates while the US economy remains strong, possibly making 1 per cent the “new zero”, according to John Lynch, chief investment strategist at LPL Financial.

Mr Lynch sees the Fed cutting rates by a quarter point twice more before the end of the year, which would bring the benchmark federal funds rate to a target range of 1.5-1.75 per cent. “Given the U.S. economy’s resilience and the already low policy rate, we do not expect the Fed to take rates much lower than the 1.5% threshold,” he said.

“Indeed, policymakers want to ensure enough wiggle room to adjust rates further when a recession may appear more likely,” Mr Lynch added. “In this scenario, a Fed funds rate of 1% could be the new zero, accompanied by other recession-fighting initiatives, including renewed quantitative easing programs.”

Surge in overnight lending rates adds twist to Fed Day

The Federal Reserve has intervened in the so-called repo market twice this week after a severe imbalance sent overnight borrowing costs surging to a historic peak.

The FT’s Adam Samson and Joe Rennison report:

In a sign of the crunch that has hit the short-term borrowing market, the Fed’s main policy rate, the federal funds rate, has jumped above the central bank’s 2 to 2.25 per cent target. Data released on Wednesday morning showed the rate rose to 2.3 per cent on Tuesday, from 2.25 per cent on Monday and 2.14 per cent at the end of last week.

The New York Fed, which conducts market operations for the central bank, last used its repurchase agreement auction mechanism during the financial crisis.

The sharp rise in overnight lending rates “seems to reflect technical factors, rather than a reassessment of counter-party risk”, said John Higgins, chief markets economist at Capital Economics.

He added: “We think that the US economy will avoid a recession, let alone experience a very deep one like it did then. The upshot is that we expect the Federal Reserve to stop cutting rates sooner than investors are currently anticipating, leading Treasury yields to rise next year.”

How will the Fed react to the Saudi oil attack?

President Donald Trump renewed his criticism of the Federal Reserve in the wake of the recent attack on Saudi Arabian oil facilities, once again calling on the central bank to cut rates.

The attack, which caused prices to spike as much as 20 per cent Monday, along with soft manufacturing data “will present Chairman Jerome Powell the opportunity to instill some discipline through the statement and the summary of economic projections to his divided committee”, according to Joseph Brusuelas, chief economist at RSM US.

ING strategists noted that central banks could react in a hawkish manner, given the upward shock to inflation through higher oil prices, but are more likely to respond to potential negative pressure on growth.

However, the Fed has the “least room for manoeuvre when it comes to ignoring any spike”, ING added. “With this in mind, we expect investors could view a prolonged increase in oil price as a threat to Fed easing.”

“The recent attack on Saudi oil facilities may give Powell extra cover to emphasize economic risks, but improving economic data and a pickup in inflation will give him little wiggle room,” according to LPL Financial. “Powell has occasionally stumbled in his press conferences when framing the Fed’s intentions, and this one may be particularly challenging.”

Oil gave up a chunk of its gains Tuesday, falling more than 6 per cent amid reports that Saudi Arabia could bring its oil operations back to normal sooner than expected. Brent, the international benchmark, was down 1.6 per cent Wednesday.

Less than five minutes to go and this is where the main markets indicators are sitting:
☻ S&P 500 has slightly trimmed declines to be 0.3 per cent lower
☻ Nasdaq down 0.6 per cent
☻ Yield on 10-year Treasury down 6.1 basis points at 1.7526 per cent
☻ Yield on 2-year Treasury down 5.7bp at 1.6799 per cent

Federal Reserve cuts rates by a quarter point

The Fed has lowered its benchmark rate by 25 basis points to a range of 1.75 per cent to 2 per cent.

Stocks starting to head lower, but Treasury yields trimming their declines.
☻ S&P 500 down 0.5 per cent, having initially showed signs of recovering in the immediate wake of the Fed’s cut.
☻ Yield on the benchmark 10-year Treasury has risen to be 4.9 basis points lower at 1.763 per cent

The statement

The Fed’s policy statement can be viewed here.

In it, the Fed once again said it “will act as appropriate to sustain the expansion”.

Language changes: stronger consumer, weaker business spending

A key change in the Fed’s statement is its view on the health of the consumer and business, with the former now looking in better shape than the latter.

The central bank said in its statement today:

“Although household spending has been rising at a strong pace, business fixed investment and exports have weakened”.

In July it said growth of household spending had “picked up from earlier in the year” and that growth of business fixed investment “has been soft”.

The vote

The Federal Open Market Committee’s vote to cut rates by a quarter point was 7-3.

Kansas City Fed president Esther George and Boston Fed president Eric Rosengren dissented, as they did in July, preferring to keep rates unchanged.

St Louis Fed president James Bullard (pictured above) voted against the move because he sought a larger cut of 50 basis points.

Stocks sinking

US equities are really copping it in the neck, 15 minutes after the rate decision.

☻ S&P 500 now down 0.8 per cent, very much the lows of the day.
☻ 10-year Treasury yield still down 4.9 basis points at 1.7655 per cent
☻ 2-year Treasury yield down 2bp at 1.7169 per cent

No ‘guts’ at the Fed, Trump says

It took 25 minutes, but here’s what the President thinks:

Dot plot shows officials divided on future rate moves

Members of the Federal Reserve’s policy-setting committee appear divided on the path for interest rates.

The central bank provides a visual representation of policymakers’ rate expectations in the form of its closely-watched dot plot. In the latest edition, the median rate forecast — 1.9 per cent — is within the new range of 1.75 per cent to 2 per cent. However, out of 17 members, five expect rates to climb back to their previous range, and seven others see one more quarter-point cut.

Powell is at the podium

Fed chair Jay Powell has begun his press conference. He started with comments on the economy, saying trade policy tensions have “waxed and waned” while job growth has remained solid in recent months despite forecasts for some slowing.

Stocks and Treasuries have moved little from where they were before the chairman took to the stage.

Fed bumps up growth forecast for 2019

US real gross domestic product is expected to grow at a rate of 2.2 per cent in 2019, according to the Fed. That’s better than its previous estimate of 2.1 per cent growth.

As for prices, the Fed’s outlook for PCE and core PCE inflation remained the same when compared with June projections between 2019 and 2021. In 2022, the central bank expects a 2 per cent rise in each measure.

Treasuries sell off

Treasuries have sold off further, pushing the yield on the policy-sensitive two-year note into positive territory. It is up 3.5 basis points to 1.774 per cent.
☻ Yield on the 10-year is down 1.6bp at 1.796 per cent.

☻ Stocks are showing little sign of improvement, with the S&P 500 down 0.8 per cent.

Rates cuts may not be the ‘elixir’ for economy

Here’s what Richard Flynn, managing director at Charles Schwab, said in reaction to the Fed’s rate cut today:

Today’s rate cut should give markets more room to breathe in a macroeconomic environment still overshadowed by trade war uncertainty, Brexit and global growth concerns. However, we still have doubts that rate cuts are the elixir which reboots the economy. Data out of the US has softened somewhat but inflation remains at or just below target, unemployment is tight, and wages are rising. The “uncertainty” facing the economy is due largely to trade rather than a function of rates being too high.

Revisiting the Fed’s balance sheet

Asked about this week’s hiccup in the short-term funding market, Jay Powell said the Fed was monitoring the situation closely, that the bank had the tools to address any pressures and that the episode was not expected to have an impact on the broader economy.

He added that in coming weeks:

It is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought.

Powell says Fed must ‘look through’ trade tensions

Jay Powell reiterated that the Fed does not set trade policy but instead focuses on supporting maximum employment and stable prices.

“We need to look through what’s a pretty volatile situation,” he said.

The economic outlook is “positive in the face of these crosswinds”, Powell said, adding that the Fed’s shift to a more accomodative stance is one reason why the outlook has remained favourable.

Bonds sell off after Fed decision

US markets reporter Colby Smith is taking the temperature in financial markets, she reports back:

The 2-year Treasury bill sold off sharply on the Fed’s announcement, with its yield at one point rising to 1.77 per cent. While it has pared back some of its earlier losses, Peter Tchir, the head of macro strategy at Academy Securities, pointed out that there is likely to be a sell-off in rates following Mr Powell’s comments today.

In fact, he said the yield on the 10-year could spike as high as 2 per cent in the coming weeks given the current state of the US economy and division among Fed officials about how much to ease monetary policy further.

“People are overplaying how weak the economy is and how accommodative the Fed will be,” he said. “The economy is not falling off the rails, and we could have a trade deal with China.”

Unlikely to adopt negative rates, Powell says

Jay Powell said the Fed was more likely to revisit large-scale asset purchases and aggressive forward guidance rather than negative interest rates in the event of a severe downturn.

Mr Powell said “it can be a mistake to hold on to firepower before a downturn gains momentum”, but added he thought the present situation could be addressed with “moderate adjustments” to the federal funds rate.

He said the Fed was prepared to be “more aggressive” if the economy weakened more, but that if the central bank reached the zero lower bound – as it did in 2008 – he did not think it would use negative interest rates.

Negative rates have been adopted by some other global central banks, most notably the European Central Bank and Bank of Japan. President Donald Trump tweeted last week he would like the Fed to cut rates to “ZERO, or less” to help the US compete with countries where borrowing costs are lower and their currencies relatively weaker.

A ‘somewhat hawkish cut’ from the Fed

With a dot plot that suggests no further rate cuts this year or next, the Fed’s rate decision today can be viewed as a “somewhat hawkish cut”, according to Candice Bangsund, vice-president and portfolio manager of global asset allocation at Fiera Capital:

While the economic assessment indeed acknowledged the healthy state of the domestic economy, the Fed softened the blow somewhat by reiterating that inflation remains subdued – which has ultimately provided them with the leeway and flexibility to monitor the incoming data and macro environment before pre-emptively making another move following today’s meeting.

Investors nearly split on October rate cut

Here’s a look at rate expectations for the Fed’s October meeting, according to CME Group. Investors now place just over 50 per cent odds on the central bank holding firm.

Jay Powell has concluded his press conference.

Federal Reserve cuts rates as policymaker splits deepen

You can read the FT’s full story here.

Stocks lower, Treasuries selling off after presser

Jay Powell’s press conference has concluded, and stocks have managed to walk their way back from the lows of the day.

☻ The S&P 500 is down 0.3 per cent, roughly where it was before the Fed decided to cut rates today.

☻ Yield on the benchmark 10-year Treasury was down 1.1 basis point at 1.8031 per cent.

☻ Yield on the policy-sensitive two-year was up 3.5bp to 1.7724 per cent.

☻ Dollar index up 0.3 per cent to 98.546.

Fresh rate cuts not off the table, analysts say

The Fed’s dot plot illustrated how officials are divided on the path for interest rates, but market strategists suggested more rate cuts may still be in the cards this year as the central bank continues to evaluate a mixed bag of US economic data, the impact of trade policy and other global headwinds.

Ronald Temple, head of US equities at Lazard Asset Management

Ignore the dot plot. What matters most to monetary policy is what happens in terms of US/China trade, Brexit, and US consumer resilience against the backdrop of slowing global growth

Charlie Ripley, senior investment strategist for Allianz Investment Management

It felt like this meeting was set up for the Fed to disappoint market expectations. The bifurcated US economy in which slowing business investment has been offset by strong consumer spending made it difficult for the committee to make a clear commitment to further easing

US stocks initially sold off following the Fed’s announcement, reacting to a more hawkish rate forecast than anticipated. But the Wall Street bounced back as Fed chair Jay Powell reiterated that officials are prepared to move if the economic outlook changes.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance

The Fed kept their statement virtually the same and, when coupled with their dot plot, may be indicating that they are done cutting rates for this year. Clearly they will continue to watch incoming economic data and if that deteriorates – or if the trade war intensifies – then it is likely that they will cut rates later this year, even if they are satisfied with the current level of rates at this time

Etrade vice-president of investment strategy Mike Loewengart noted the central bank’s accommodative stance “comes at a time of conflicting economic signals”

With inflation still short of the Fed’s sweet spot and bond yields hinting at an economic slowdown, the Fed may not be done cutting rates this year

However, he added, “the more aggressive the Fed is when the economy is growing, the less cushion it has when economic fundamentals deteriorate.”

US stocks claw back to finish higher

US stocks fought their way back into positive territory following the Federal Reserve’s decision to cut interest rates, as investors digested remarks from Jay Powell and a more hawkish outlook than anticipated.

Wall Street’s S&P 500, which added to losses immediately after the announcement, clawed back to be less than 0.1 per cent higher at the close of trading in New York. The index had been nearly 1 per cent lower in the early parts of Mr Powell’s press conference.

The 10-year Treasury yield was 1.8 basis points lower at 1.7961 per cent. The two-year yield, which is more sensitive to monetary policy, was up 2.5 basis points at 1.7621.

You can read a full recap of today’s market moves here.

Our markets commentator Mike Mackenzie gives his expert view on the Fed rate cut here

Another interest rate cut by the US Federal Reserve on Wednesday was accompanied by a message that sets a higher bar for a further easing later this year and during 2020.

And that’s a wrap

Thank you for following our live blog. For more coverage of the Fed, you can read the FT’s full story here.