Powell Finds a Way to Disappoint Markets. Again.

The Federal Reserve, by cutting interest rates for the first time in a decade, signaling more reductions are possible and ending its balance-sheet reduction two months early, did what the market expected. Then Fed Chair Jerome Powell, who has a history in his relatively short tenure of making some incredible communication gaffes that have roiled markets, did it again.

At his press conference a half hour after the Fed announced its decision, Powell said this rate cut wasn’t necessarily the start of an easing cycle. Stocks went from little changed to having the rug pulled out from under them, with the S&P 500 Index falling as much as 1.83%, while the closely watched gap between short- and long-term U.S. Treasury yields narrowed and the dollar soared. None of this was desirable for a Fed chairman and a central bank in the crosshairs of President Donald Trump, who has complained that Powell has “no feel” for markets. But of those market reactions, the movement in bonds may be the most concerning. To refresh, a flattening yield curve is generally a sign that bond traders see slower economic growth and inflation. So the reaction in the bond market, where the gap between two- and 10-year yields shrank to 0.14 percentage point from 0.23 percentage point, is in direct conflict with Powell’s opening statement that the rate cut was aimed at insuring against further downside risks to the economy while sparking faster inflation toward the central bank’s target. Also note that at the start of the last two easing cycles, in January 2001 and September 2007, the yield curve steepened, as you would expect it would. “The flattening of the curve implies investors are worried about a potential 'policy error' if the Fed doesn't act further,” the top-ranked team of rates strategists at BMO Capital Markets wrote in a note to clients.