01 Aug THE FED DID AS EXPECTED
As widely expected the FOMC lowered interest rates by 0.25% to insulate the US from slowing global growth. The Committee also stopped shrinking the Fed’s balance sheet effective August 1 as compared to the previously announced date of September 30.
Policy makers appeared opened to another cut as early as September when they next convene, while sticking with wording in their statement that preserves their options.
The Committee commented “As the Committee contemplates the future path of the target range of the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
Markets had little initial reaction to the outcome as such was largely expected but upon further reflection some believe the outcome was not as dovish as anticipated given the two dissents and various interpretations of the statement and post meeting press conference.
During the post meeting press conference, FRB Chair Powell stated that today’s action was designed too “insure against downside risks rather than signal the start of a lengthy cycle of monetary policy easing.” This comment is perhaps the nascent shattering of the illusion of the Fed acting in a more dramatic fashion between now and year end.
Equites sold off considerably but recovered about half of their declines closing down about 1.2%. According to Bloomberg this is the first 1% day since June 7.
I am certain the blather will exponentially rise about the Fed and the market reaction. To place yesterday’s 1% move into perspective; there has been a total of 18 one percent days so far this year comparted to an annual average of 53 over the past 60 years. If there was normal market churn, between now and year end there would be about one and one half 1% days per week.
Historically volatility proceeds periods of low volatility, perhaps the result of shattering complacency and unfounded illusions.
Changing topics, yesterday legendary investor Lee Cooperman made comments about market instability. For many reasons including Dodd Frank and the regulatory dogma that emphasizes cost and speed of execution, the markets can move radically in either direction based on little reason.
To write the obvious attention will only be paid when prices plunge. Cooperman commented that today it is all about momentum and nothing about value with great emphasis upon the importance and direction of interest rates. There is no “other side of the trade.” Risk stabilizing mechanisms are absent given the inability for the traditional participants to act in volatile moments. In other words the ability to achieve profit in providing liquidity in volatile times is no longer present.
Cooperman reiterated similar remarks as to mine that the risks have now shifted to the “buy side,” a buy side that will disappear in difficult times under the simple premise fear is more powerful than greed. He further stated such an environment is conducive for a large unexplained sell off that can easily cascade into a liquidity crisis as sellers are unable to be matched up with buyers for buyers become virtually nonexistent.
If yesterday’s sell off continues predicated upon a less than dovish outlook, could we then conclude Mr. Cooperman’s warnings about the outside impact of interest rates be very prescient?
Tomorrow the all-inclusive July employment data is released. How will the data be interpreted?
Last night the foreign markets were mixed. London was down 0.17%, Paris up 0.50% and Frankfurt up 0.25%. China was down 0.81%, Japan up 0.09% and Hang Sang down 0.76%.
The Dow should open mixed. The 10-year is 8/32 to yield 2.05%.