U.S. stocks ended Wednesday flat to higher, after the Federal Reserve announced it would cut its benchmark federal funds rate a quarter percentage point, in line with market expectations, but included language in its accompanying statement and economic projections that called into question whether there will be another rate cut this year or next.
Equities pared their losses during a press conference by Chairman Jerome Powell, led by bank stocks, and after he talked up the strength of the U.S. economy and suggested that the Fed may need to expand its balance sheet in order to combat a liquidity shortage that has beset money markets in recent days.
How did the major benchmarks fare?
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.66% rose 36.28 points, or 0.1% to 27,147, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.74% added 1.03 point, or less than 0.1%, to 3,006.73. The Nasdaq /zigman2/quotes/210598365/realtime COMP +0.88% lost 8.63 points, or 0.1%, to close at 8,177.39.
At session lows, the Dow was down 211.65 points, the S&P had lost 26.97 points and the Nasdaq fell 99.80 points.
What drove the market?
The Fed announced it would cut the benchmark federal funds rate a quarter percentage point to a range of 1.75% to 2% Wednesday afternoon, but said in an accompanying statement that “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective are the most likely outcomes.”
The language of the statement appeared to communicate that Wednesday’s rate cut would be the final one of the year, while fed funds futures markets have shown that investors expected at least another rate cut between now Dec. 11, the interest-rate setting committee’s final meeting of 2019.
The Fed also released a survey of Fed Board members and regional Fed bank presidents, which showed that the median respondent believes the Fed funds rate would be at present levels through the end of 2020.
Three members of the Federal Reserve’s interest-rate setting committee voted against Wednesday’s decision, with Kansas City Fed President Ester George and Boston Fed President Eric Rosengren voting against a rate cut, while St. Louis Fed President James Bullard preferred to cut rates by 50 basis points, rather than 25.
“The statement was largely unchanged from July and, along with the new economic projections that were also almost completely unchanged – it suggests most Fed officials still see a rebound in economic growth as their base case scenario, which means any further rate cuts would be limited,” wrote Paul Ashworth, chief U.S. economist at Capital Economics, in a note.
During a news conference following the decision, Fed Chairman Jerome Powell talked up the strength of the economy, saying that the Fed funds rate was cut “in order to provide insurance against risks,” including weak global growth and concerns over trade policy.
Bond yields rose in the wake of the decision, with the yield on the 10-year U.S. Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% paring its losses from 7 basis points to 2 basis points, to 1.788%. The yield on the 2-year U.S. Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y 0.00% rose 3 basis points to 1.754%.
Those moves buoyed the banking sector, with shares of J.P. Morgan Chase & Co . /zigman2/quotes/205971034/composite JPM +0.34% rising 1% and shares Goldman Sachs Group Inc . /zigman2/quotes/209237603/composite GS +1.34% adding 0.5%. The two moves combined to add roughly 16 points to the Dow Jones Industrial Average.
“Markets were already pricing in a 25 basis-point cut, and what they wanted to learn was whether there would be more cuts in the future,” Shawn Cruz, manager of trader strategy at T.D. Ameritrade told MarketWatch. “The details we got out of the meeting and the tone of the press conference told us it’s not a sure thing that we’ll see a continuation of stimulus.”