Dow Drops on Fears of Less Aggressive Federal Reserve

Federal Reserve Chairman Jerome Powell sparked quite a rally when he signaled the central bank was ready to cut rates this month.

Now, many are concerned the Fed may be backing off of that promise.

“I think they’re concerned that maybe the Fed might be backing off,” said Art Cashin, director of floor operations at UBS, as quoted by CNBC.  “Durable goods were much better than expected. That’s got some people talking about possibly revising GDP forecasts.” 

Plenty of Reasons for the Central Bank Not to Act

In addition, the Commerce Department reported that retail sales were up 0.4% between May and June 2019.  That was much better than the 0.1% economists had expected. It may have been even stronger had it not been for the 2.8% decline in gas station sales on the heels of lower fuel costs.   Consumer spending looks to have grown as much as 4.3% in the second quarter, according to The Wall Street Journal.

At the same time, the Federal Reserve just reported that manufacturing output increased 0.4% between May and June 2019, as well.  

Expectations for a cut fell even more after ECB President Mario Draghi said there was not a big risk of recession in Europe.  That led some to believe the ECB would not be aggressive with its easing policy and that the Fed could follow suit.

At the moment, it’s all up in the air. 

While there are hopes for quarter, even a half point, there’s a real possibility of nothing.

While market-implied volatility of no cut has been around zero, that doesn’t mean there’s no support for just holding the line.

For example, Boston Fed president Eric Rosengren said, “I think we should wait,” as noted by CNBClast week.  “So, given that the economy is quite strong, given that I do think that inflation is going to be very close to 2%, and given that the growth in the economy is satisfactory, I think that’s an environment where you don’t have to take a lot of action.”  

Kansas City Fed President Esther George told The Wall Street Journal that she doesn’t see the case for a cut in interest rates this month.  “When I look at the current settings for monetary policy, my own outlook suggests we will continue to see growth in the economy around or slightly above the trend rate of growth, we see an unemployment rate at a 50-year low and continued job gains as recently as the most recent employment numbers.”

Again, it’s a wait and see, but you can see markets are nervous with the Dow down 170.