The Federal Open Market Committee (FOMC) wrapped up its latest monetary policy meeting this afternoon with a gift for Wall Street. It hinted as aggressively as it possibly could, without explicitly stating it, that it is open to cutting rates in 2019. Of course, the FOMC doesn't want to lock itself into anything just yet, so it is trying to be somewhat coy while flirting with a more accommodative monetary policy.
Here's what happened. The FOMC started off with a classic economic on-the-one-hand-but-on-the-other-hand setup in its monetary policy statement. On the positive side, the Committee said, "Job gains have been solid, on average, in recent months, and the unemployment rate has remained low." On the negative side, the Committee said, "…indicators of business fixed investment have been soft."
Having covered both its bullish and bearish economic bases, the FOMC left the target range for the federal funds rate unchanged at 2.25% to 2.50% for now. The group then started to lay the groundwork for potential rate cuts in the future by providing three key hints.
Hint #1 came in the monetary policy statement. The statement said, "In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion…" This is a huge hint because the FOMC typically sustains economic expansion by cutting rates.
Hint #2 came in the votes. For the first time this year, a member of the FOMC – James Bullard – voted to lower the target range by 0.25%.
Hint #3 came in the economic projections. The Committee slashed its federal funds rate expectations for 2020 from 2.6% to 2.1% and cut its inflation projections for 2019 from 1.8% to 1.5% (see the table below).
When you put it all together, the FOMC did everything it could to prepare Wall Street for a potential rate cut at the July monetary policy meeting – or if not at the July meeting, at least before the end of the year.
As I said in the title of today's post, this was a surprise to nobody, but it was a necessary confirmation. Stocks have risen the past few weeks with the expectation that interest rates are going to drop and trade relations between the United States and China are going to improve.
Seeing at least one of those expectations confirmed should provide more bullish fuel for the uptrending fire in equities.
The S&P 500 continued to move higher after the FOMC released its monetary policy statement, bringing the index closer to its all-time high of 2,954.13. However, even though the FOMC did everything Wall Street was hoping it would do, the S&P 500 didn't take off in a bullish bolt of lightning.
That's because today's announcement was a classic "buy the rumor, sell the news" scenario. Traders have been pushing stock prices higher for weeks on the rumor that the FOMC was going to become more dovish and start looking at cutting interest rates. Now that the news has come out and the rumor has been confirmed, some of the early buyers are taking profits off the table.
Now we wait to see if economic and corporate news can remain strong and continue pushing share prices higher.
Risk Indicators – TNX
Looking at the movement of the TNX compared to the S&P 500, you may be wondering why Treasury yields are breaking through support while stock prices haven't been breaking through recent resistance levels. The primary difference seems to be driven by the fact that we know yields are going to drop if the FOMC cuts rates. However, there is no guarantee that stocks will rise if the FOMC cuts rates. Traders hope stocks will rise if rate cuts make it cheaper to borrow and expand operations and share buyback programs, but it's not a foregone conclusion.
Watch the 2% threshold on the TNX. If we get a bounce above that level, chances are good that the stock market will get a lift as traders move money out of Treasuries and back into stocks. Conversely, if the TNX drops below 2%, it will likely be a strong signal that bond traders are bracing for a recession in the coming 12 months.
Bottom Line – FOMC Delivered
The FOMC did exactly what the majority of traders on Wall Street were expecting it to, which is good. Traders love it when there are no big surprises. The table is set for more bullishness on Wall Street if we don't get spooked by anything else.
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