Wednesday's Market Minute: Fed Decision – What's The Big Deal?

So, the Fed is going to cut rates. What’s the big deal?

The most innocuous explanation for today’s actions by Jay Powell is that inflation hasn’t continuously hit the Fed’s target and therefore they are adding a little more gas to the fire to get there. Dovish central banks have been the hallmark of this recovery, and this isn’t any different – that’s one interpretation. There is good reason to question it.

One other answer is the cut is coming because the market says it should, and the FOMC effectively acknowledged this in its June meeting when it said “supportive conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy.” So the Fed is now acting similar to a market analyst, seemingly adhering to the old adage that the bond market knows best, which investors often say is “smarter” than stocks.

But what if incessant yield-chasing muddied this signal? What if bonds are no longer as smart as they used to be? Economic conditions have not visibly worsened since the Fed’s last hike, and a cut has never happened before with financial conditions (via Chicago Fed) as solid as they are today. A fatal flaw for many poker players is that they are results-oriented. They lose a hand, so they think they played it wrong, and adjust play based on other players, instead of what the probability commands. If the Fed is hiking because the market moved in such a way, it risks being beholden to it in the future.

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Posted In: NewsFederal ReserveMarketsGeneralTDAmeritrade
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