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Fed Rate Cut Pleases Neither Trump nor Markets


Aug. 1 2019, Published 8:44 a.m. ET

The Federal Reserve lowered interest rates by 25 basis points yesterday. Neither Donald Trump nor markets were impressed, though the Fed rate cut was largely expected. The Fed said, “the labor market remains strong and that economic activity has been rising at a moderate rate.” It added, “Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.” Fed chair Jerome Powell attributed the rate cut to “weakening global growth,” “trade policy developments,” and “inflation running below target.” The European Central Bank also recently signaled that it might cut rates. However, despite cutting rates, the Fed maintained that the US economy has been resilient. It added that growth was better than expected in this year’s first half.

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Future adjustments to policy rates

Powell has dashed hopes of more rate cuts. He called the rate cut “a mid-cycle adjustment to policy,” explaining it is not “the beginning of a lengthy cutting cycle.” Markets were expecting the Fed to signal more rate cuts.

Markets sell off despite Fed rate cut

US markets sold off yesterday. The S&P 500 (SPY) fell 1.1% but stayed near its all-time high. Meanwhile, NVIDIA (NVDA), Micron (MU), and Broadcom (AVGO) fell 10.1%, 5.4%, and 3.2%, respectively. Qualcomm (QCOM) fell 2.2% even after beating earnings expectations, whereas Advanced Micro Devices (AMD) fell 3.8% after its revenue miss. However, Apple (AAPL) gained 2.0% following better-than-expected quarterly results.

This month, NVIDIA is set to release its quarterly results. Micron and Broadcom are slated to release theirs in September.

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Trump’s reaction to Fed rate cut

Yesterday, Donald Trump tweeted, “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.” He added, “As usual, Powell let us down,” and “I am certainly not getting much help from the Federal Reserve!” Notably, Trump had called for a bigger rate cut before the Fed’s meeting.

Powell denies political considerations

Meanwhile, Powell tried to ease concerns that the Fed is bowing to political pressure, saying, “we never take into account political considerations.” Earlier this year, there were reports that Trump might replace Powell with a new official. At a June news conference, Powell said, “I think the law is clear that I have a four-year term, and I fully intend to serve it.” He added, “At the Fed, we’re deeply committed to carrying out our mission and also that our independence from direct political control.”

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Analysts react to Fed rate cut

BNY Mellon strategist John Velis said, “By not coming out and promising more cuts in the future, the market appears to have interpreted this policy move as hawkish.” And Jefferies chief financial economist Ward McCarthy said, “My take is they’re worried about downside risks.” He added, “Since they’ve already taken the step [to cut rates], they’ll probably take another, but his comments and the two dissents suggest this is not the beginning of a major easing cycle and that’s what hammered the market.”

Our views

As we had noted before the Fed’s meeting, the Fed cannot ignore global weakness while the US economy is reasonably strong. Trade uncertainty is another burning issue for markets and has been hampering corporate investments. Furthermore, the US manufacturing sector has been weak. Tax cuts and tariffs were expected to revive US manufacturing and investments. However, these sectors have turned out to be weak links in an otherwise strong economy.


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