Investors and the Fed: I’m OK, You’re OK

Stock-market reaction to the Federal Reserve’s rate-cut announcement was muted. Traders at the New York Stock Exchange Wednesday.


Mark Lennihan/Associated Press

Updated Sept. 18, 2019 3:55 pm ET

The big news out of the Federal Reserve Wednesday is that most policy makers don’t expect to cut rates further this year. The bigger news is that, for now at least, stock-market investors don’t seem all that upset. The Fed’s policy-setting committee lowered its target range on overnight interest rates by a quarter point to a range of 1.75% to 2%, just like nearly everyone thought it would, and offered up a policy statement virtually identical to the one released following July’s meeting. The economic projections the Fed released Wednesday were where the action was. These showed that, on balance, policy makers expect to leave rates unchanged, with seven officials penciling in one further cut this year, five expecting no further rate moves and five opting for an increase.

Those differences in opinion reflect an uncertain outlook for the rest of the year. On the one hand, low unemployment, strong consumer spending and a pickup in inflation suggest the Fed shouldn’t be cutting rates. Conversely, trade tensions and slower global growth could cause the U.S. problems. To judge by the stock market, investors were all right with the mixed message. In late afternoon trading, the S&P 500 was around where it was before the Fed announced its rate move. The muted stock-market reaction might have come about in part because investors recognize that the Fed’s projections don’t amount to promises. If the economic news worsens, the central bank is still ready to cut rates further. But the fact that the market didn’t react strongly also suggests investors don’t think policy makers are wildly off base when it comes to the economy. It counts as a much different situation than the end of last year when the Fed’s rate-lifting plans contributed to a deep selloff in stocks. Or to put it differently, Fed policy makers aren’t sure they will need to cut rates again, and neither are investors.

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