Fed Leans Surprisingly Dovish, Wrong-Footing the Marketplace

The Federal Reserve’s Open Market Committee on Wednesday afternoon delivered a 0.25% interest rate cut, which was fully expected by the marketplace and was the third quarter-point rate cut in a row at the FOMC meetings. The FOMC voted 9-3 to lower the benchmark federal funds rate by a quarter point to a range of 3.5%-3.75%. The FOMC statement suggested greater uncertainty about when the Fed might cut rates again. The Fed surprised markets by saying it will begin buying $40 billion of Treasury bills per month starting Friday, in a move to further ease short-term funding costs by rebuilding reserves in the financial system. Money markets have been flashing signals in recent months that pressures were building up in the $12.6 trillion market while the Fed was shrinking its balance sheet. U.S. stock indexes rallied, U.S. Treasury yields dipped, the U.S. dollar index sold off, and gold and silver prices rallied following the FOMC meeting’s conclusion and Fed Chair Jerome Powell’s press conference Wednesday afternoon. In the days leading up to this week’s FOMC meeting, most of the marketplace came to reckon that despite the expected rate cut, the Fed and Powell would deliver a somewhat more hawkish tone on U.S. monetary policy. However, the marketplace saw the Fed’s dovish move to buy U.S. Treasury bills as usurping any other Fed rhetoric that might have been deemed hawkish.
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