As expected, on July 31, 2019, the Federal Reserve Open Market Committee cut its key fed funds rate by one-quarter of a point. The new range is now 2/2.25%. This decision was the first decrease in more than ten years. Treasury rates adjusted downwards as the 30-year bond yield fell to 2.52% and the ten-year bond yield dropped to 2.02%. By comparison, the dividend yield on the S/P 500 Index is 1.89%
The initial stock market reaction to the Fed’s rate cut was muted with the Dow Jones Industrial Average (“DJIA”) falling about 30 points. After Fed Chairman Powell began speaking at the scheduled news conference, however, the stock market sold off sharply. At one point, the DJIA was down almost 400 points, before rallying in the afternoon to finish down 334 points, or 1.2%. In his comments, Chairman Powell suggested that this rate reduction should not be classified as part of a trend, throwing cold water on traders who were hoping for a larger cut or a statement that more cuts will be coming. The Fed will watch the economic data carefully looking for hints of inflation which do not appear serious at this time. If the US GDP growth rate slips or the jobs data begin to weaken then more rate cuts would be considered, but for now, investors must be content with the Fed’s recent gift. Expectations for future near-term rate cuts do not appear to be in the Fed’s current thinking. Two of the voting members of the Committee voted against the rate cut so future cuts will not be rubber stamped unless the economy stumbles badly in the next few months.