Market update: Federal Reserve cuts interest rates by 0.25% for the second time this year (18 September 2019)

FOMC Decision: Fed cuts its benchmark overnight lending rate 25 bps to 1.75-2.00% as widely expected

There was a 7-3 vote to cut the target range for the fed funds rate by 25 bps to 1.75-2.00%. Boston Fed President Rosengren and Kansas City Fed President George dissented on the belief the target range should be left unchanged at 2.00-2.25%. St. Louis Fed President Bullard dissented on the belief the target range should be cut by 50 basis points.

• Nasdaq Composite +23.2% YTD
• S&P 500 +19.9% YTD
• Dow Jones Industrial Average +16.4% YTD
• Russell 2000 +16.3% YTD

The FOMC voted 7-3 to cut the target range for the fed funds rate by 25 basis points to 1.75-2.00%, as expected. Price action leading up to the decision was muted and volatility quickly ensued after the policy directive. Buying conviction, however, was largely absent before and immediately after the decision as the market extended losses heading into Fed Chair Powell's press conference.

Key takeaways from the Fed's policy decision included:

(1) Voting members remained divided: St. Louis Fed President Bullard preferred a 50-basis points cut, while Boston Fed President Rosengren and Kansas City Fed President George preferred no change in the fed funds rate; (2) the median Fed member is suggesting there will be no more rate cuts in 2019 and 2020; and (3) the interest paid on excess reserve balances was lowered to 1.80% from 2.10% -- which could provide some stability in the repo market after the New York Fed injected more liquidity today.  

Selling pressure soon abated and stocks climbed to session highs, with the S&P 500 financials sector (+0.4%) providing influential leadership, as the Fed Chair Powell wrapped up his press conference. The utilities sector (+0.5%) outperformed, while the energy sector (-0.4%) underperformed as oil prices ($58.07/bbl, -1.30, -2.2%) continued to pull back. 

Mr. Powell said the Fed does not see a recession, is not interested in negative rates, and the repo issue has no implications for the economy or monetary policy. FedEx (FDX), meanwhile, provided a pessimistic view on the global economy. The company cut its FY20 EPS guidance due to a weakening global environment, driven by trade tensions and policy uncertainty.


President Donald Trump, who has been bashing the Fed on Twitter and demanding a larger cut, was predictably fast on his fingers.

President Trump, who has called Fed policymakers “boneheads” for not cutting rates enough, tore into Wednesday’s decision, saying Chairman Jay Powell and his colleagues have “no ‘guts.’” Trump says the Fed is risking U.S. competitiveness by keeping rates substantially higher than most of the rest of the developed world.

But Powell said he does not believe the Fed will ever resort to negative rates, instead relying on asset purchases and forward guidance, as it did following the 2008 financial crisis. For now, though, Powell foresees continued moderate growth for the U.S. economy.