Fed's Good Deed Unlikely To Be A ‘Mid-Cycle Adjustment'

Why did the US equity market not respond favourably after the Fed lowered interest rates in July?

- Maarten Mittner

In a contemplative moment US Federal Reserve chair Jerome Powell might have recently thought about the old saying that “no good deed goes unpunished”.In July, the Fed performed a good deed, lowering interest rates by 25 basis points. Despite being committed to a rate-hiking stance, the Fed took cognisance of “further downside risks”, even though the US economy is experiencing steady growth, record-low unemployment and subdued inflation.

But instead of being lauded for looking forward and not rigidly adhering to an established stance, the Fed was harshly punished. The Dow dropped sharply to negative territory in August, losing 3.05% in daily trade on 14 August, while bond yields fell to their lowest levels since President Donald Trump’s election victory in 2016.

Lower interest rates usually support equity markets. So, what happened this time?

The Fed simply did not come across as believable after the 25 basis-point cut, which coincided with a host of other global risk factors, most importantly the trade spat with China. Markets expected at least 50 basis points as Powell described the cut to be a “midcycle adjustment”. More cuts are not guaranteed, Powell said.