Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

A rally and a redirect: why the markets are so focused on the Fed

EconomyJul 19, 2019 06:27PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange as Federal Reserve Chairman Jerome Powell holds a news conference on the television behind them in New York

By David Randall, Trevor Hunnicutt and Lewis Krauskopf

NEW YORK (Reuters) - When New York Fed President John Williams (NYSE:WMB) talked about the need to "vaccinate the economy" on Thursday, markets listened. And when the New York Fed itself spoke up later to clarify his remarks, investors were again all ears.

In fact, as the U.S. central bank nears what is expected to be its first rate cut in a decade, global markets are hanging on to every clue about the upcoming decision to an unusual degree. Investors are trying to gauge whether policymakers are seriously worried about a sharp economic downturn or simply want to insure against that possibility.

One reason for investor confusion stands out. Fed Chair Jerome Powell has set the table for an interest-rate cut but has failed to win consensus why one is needed. Policymakers in recent weeks have sketched out rate-cut rationales ranging from bond market behavior to low inflation to the need to boost wages. Some have also suggested they do not see the need for a rate cut in the first place, as Boston Fed President Eric Rosengren did on Friday.

So when Williams, Powell's No. 2 at the policy-setting table, appeared to provide some clarity, traders jumped on it.

U.S. stocks and bonds and futures contracts tied to the Fed's policy rate rallied on Thursday, milliseconds after remarks from Williams that appeared to suggest an appetite for forceful rate cuts. The benchmark S&P 500 (SPX) on Friday remained near the all-time high set earlier this week.

"It's better to take preventative measures than to wait for disaster to unfold," Williams said at an academic conference on Thursday. "Don't keep your powder dry."

Later in the day a New York Fed representative said Williams' comments were "not about potential policy actions" at its upcoming rate-setting meeting, but academic in nature.

In the speech, Williams cited years of his own research. Stretching back at least five years as a policymaker he has repeatedly used similar phrasing to describe how the Fed should behave when interest rates are near zero.

But investors now are listening extremely closely.

Markets have long been expecting the Fed to cut rates at its July 30-31 meeting. Williams' comments were read by some as not only endorsing that view, but suggesting the need for a deep, 50-basis-point cut.

Not even St. Louis Fed President James Bullard, the lone Fed policymaker who voted at the Fed's June meeting for a rate cut, has gone that far. On Friday Bullard again said he supports a quarter-point cut.

Futures market odds of a 50-basis-point cut at the July meeting soared to 71% late Thursday immediately after Williams' speech but fell to 23% on Friday, according to CME Group's Fedwatch Tool.

(GRAPHIC - Market bets on a 50 basis point Fed cut:

President Donald Trump, who has repeatedly castigated the Fed for raising rates, also weighed in. "I like New York Fed President John Williams first statement much better than his second," Trump tweeted Friday.

"His first statement is 100% correct in that the Fed 'raised' far too fast & too early," Trump wrote as he again blamed the Fed's rate hikes for holding back economic growth.

Williams has not said the Fed raised rates too fast or too early, and his record of remarks and policy votes shows he supported all of the central bank's nine rate increases since 2015.

Fed policymakers, meanwhile, face the risk of disappointing markets if their communication is not pitch-perfect. Any selloff could worsen financial conditions and increase the risk of a bad outcome for the economy.

The New York Fed did not comment on the market reaction or the comments by Trump. Policymakers on Saturday enter a traditional "blackout" period before their upcoming meeting, during which they avoid making policy pronouncements of any kind.

"The Fed has been behind the curve for market pricing for about eight or nine months and they can go a long way to correcting the inverted curve by cutting 50 basis points," said Gary Cloud, a portfolio manager of the Hennessy Equity and Income Fund. The problem, he said, is if the Fed is seen as "kowtowing to pressure by the president or that they know something negative about the direction of the economy that we don't know."

Given that Williams is vice chair of the Federal Open Market Committee, "one can appreciate" why market expectations shifted toward a 50 basis point cut, Mike O’Rourke, chief market strategist at JonesTrading, wrote in a note, adding that it is "alarming" that the Fed is having trouble communicating with markets.

"It is not a big deal when markets are at all-time highs, but the rest of the time it matters a very great deal," O'Rourke said.

A rally and a redirect: why the markets are so focused on the Fed

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Michael Angelo
Michael Angelo Jul 19, 2019 9:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The question here will be if the companies will deliver and inflation rise. Otherwise this will become a worldwide fight on currencies that God knows how will end.
Mart Bab
Rubberduck1973 Jul 19, 2019 5:58PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
First of all. Because the FED raised rates, there is gunpowder. Secundly, facts matter.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email