Stocks gave up gains and turned red after Federal Reserve Chairman Jerome Powell poured cold water on the idea that investors should expect another interest rate cut in December.
Powell made the comments at a press conference after Fed officials voted on Wednesday to cut interest rates by a quarter of a percentage point. Powell’s remarks about future monetary policy overshadowed the decision.
“A further reduction in the policy rate at the December meeting is not a foregone conclusion,” Powell said.
GOVERNMENT SHUTDOWN FALLOUT SHIFTS FROM FEDERAL WORKERS TO WELFARE RECIPIENTS
The chairman said there was no consensus among the 19 people who participated in this week’s Federal Open Market Committee meeting about what should be done with interest rates at the Fed’s next meeting in December.
“There were strongly differing views today, and the takeaway from that is we haven’t made a decision about December,” he said.
The stock market, which, all else equal, favors rate cuts, dipped after the news. The Dow Jones Industrial Average dropped about 100 points, and the benchmark S&P 500 also fell.
Powell’s comments were at odds with investor expectations.
Ahead of Wednesday’s meeting, investors were putting the odds of a December rate cut at near-certain 99.5%, according to the CME Group’s FedWatch tool that calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. After Powell’s Wednesday afternoon press conference, those odds had shrunk to just over 88%.
Notably, one FOMC participant, Jeffrey Schmid, the president of the Federal Reserve Bank of Kansas City, dissented at this week’s meeting and said he didn’t want to see interest rates cut at all for the time being.
Part of the reason for the uncertainty is gaps in data. To some extent, the Fed has been flying blind when it comes to labor market data because of the government shutdown, which has caused hundreds of thousands of federal workers, including those responsible for putting together economic indicators, to be furloughed.
The Fed is currently attempting to balance its dual mandate — price stability and maximum employment. Inflation is still running too high, but there are recent signs that the labor market is meaningfully softening.
The most recent available data shows the economy added just 22,000 jobs in August, and the unemployment rate rose to 4.3%. Also, the July jobs report revealed that some 258,000 fewer jobs were added in May and June than previously reported.
Additionally, the government announced that labor market growth for the 12 months ending in March was 911,000 jobs fewer than previously reported.
If the Fed receives more indications that the labor market is further deteriorating, it could cut rates in December.
CONSUMER CONFIDENCE FALLS SLIGHTLY AS GOVERNMENT SHUTDOWN WEIGHS ON HOUSEHOLDS
“Our base case remains for the FOMC to reduce the fed funds rate by another 25 bps at its December meeting,” economists from Wells Fargo wrote in a note on the Fed decision. “That said, with finely balanced risks around the inflation and employment objectives, a deluge of data on the other side of the shutdown could quickly shift the outlook and our expectations for the December meeting.
“Chair Powell does not think it is a slam dunk decision, and neither do we,” they added.
