The Fed still has high hopes this is only going to be a mid-cycle adjustment. The third consecutive rate cut appears to be the last one we will see at least until early next year. The risks to the outlook have moved in a positive direction and the Fed seems committed to following the playbook from the 1990s in delivering 75 basis points in rate cuts and staying on hold. Powell’s mistake could be that economy was stronger in 1995 and 1998 when the Fed delivered the last two mid-cycle adjustments.
The removal of “act” as appropriate triggered a little risk aversion as stocks dropped and the dollar firmed up. The Fed pretty much signaled they are in pause mode and will wait to see if we continue to see positive developments with the US-China trade war. The outlook on the economy was upbeat and this was unnecessary as they have given many hawkish hints that they could be closer to bending back toward rate increases. Inflation is anchored, albeit somewhat firmer recently, but nowhere near running the risk of running hot.
Powell delivered a hawkish cut that has pretty much locked the Fed into keeping the rates on hold in December and possibly into the spring, despite huge geopolitical risks from the trade war and Brexit. A lot could go wrong in a moments notice and this may go down as huge policy mistake.
Oil prices sank after a surprise build with the EIA crude oil inventory report showed US stockpiles are continuing to rise. The US also became a net importer for the first time in just over a month. While the velocity in US production has slowed earlier in the year, it seems to be picking up now, surging to 12.6 million barrels a day.
Oversupply concerns are dampening the optimistic outlook to the economy that the Fed painted. West Texas Intermediate crude appears to be vulnerable again to testing the low 50’s again.
Gold survived the Fed’s hawkish cut. The optimistic outlook to the economy and hawkish risks saw gold initially plummet, but investors will still flee to gold as their favorite safe-haven trade as too many risks remain to the global outlook.
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