Yahoo Finance How the Federal Reserve could spook the stock market before Halloween
A ginned up stock market is demanding its latest pound of flesh from the Federal Reserve when it announces its decision on interest rates Wednesday, the day before Halloween.
And if it doesn’t get it in the form of another 25 basis point rate cut and dovish presser from Fed Chair Jerome Powell, the market is likely to take a chainsaw to stock prices not unlike Halloween movie villain Jason Vorhees to an unsuspecting passerby.
“I think you have to be very nervous if you are a Fed official about sending a negative signal to the real economy. I am not talking about Wall Street, I am talking about the average person the street and the average business. Three interest rate cuts to me across three months signals panic, not something that is in control,” J.P. Morgan Asset Management global market strategist Alex Dryden said on Yahoo Finance’s The First Trade.
Others agree Powell is walking a tightrope into the second to last FOMC meeting of 2019.
Explained Payden & Rygel chief economist Jeffrey Cleveland, “The Fed has to do its best not to say boo to the stock market. So they have to deliver the rate cut, there will be some dissenters so that that will bring some uncertainty. But I think they want to leave the option on the table to cut again. They don’t want to shut the door on that by saying they are done.”
A loud boo in the face of Mr. Market by the Fed could come in its policy statement, suggests veteran trader Tom Essaye of Sevens Report Research.
“The first is about midway through the paragraph and it states “uncertainties about this outlook remain.” The phrase is the Fed referring to its optimistic view of the U.S. economy (i.e. things look fine but uncertainties remain). One way the Fed could tell markets it is done cutting rates is to change this statement to say that “risks are balanced” or something similar. Point being, the Fed could remove the “uncertainty” part and just be more confident in its positive view. Such a move would be hawkish,” warns Essaye.
Adds Essaye, “Second, at the end of the second paragraph, the Fed said in September it “will act as appropriate to sustain the expansion.” This effectively told us the Fed is willing to cut rates at the next meeting. Tomorrow, to signal it’s done with rate cuts, the Fed could remove this sentence, and/or insert the word “patient” somewhere in the second paragraph. This would essentially be the Fed telling markets rate cuts are over, and the Fed is on hold.”
That, too, would be hawkish Essaye believes and likely negative for stocks.
By and large, the market expects the Fed to deliver its third interest rate cut of the year on Wednesday afternoon. Another cut to the Fed funds rate would bring the range to 1.5% and 1.75%, compared to 2.25% and 2.5% earlier in the year. The rate cuts have mostly been viewed on Wall Street as simply dialing back the hikes last year from Powell that went onto tank the stock market in December 2018 — not necessarily more aggressive monetary policy.
So, investors are betting Powell & Co. will truly go down the path of an easing campaign in 2020 to counteract the negative economic impact of the U.S. versus China trade war. Inflation has also continued to be below the Fed’s targeted 2% level, leaving the scope for more rate cuts.
Those bets on even lower rates by investors could easily be seen in the record-setting S&P 500 this week.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi
Read the latest financial and business news from Yahoo Finance
SmileDirect co-founder: here’s what life will look like post IPO
Starbucks CEO on what China has in store for the coffee giant
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
