Interest Rate Shift Delivers Stock Price Surprise

Like all good gifts, the U.S. Federal Reserve’s decrease in the its benchmark interest rate by 50 basis points was intended surprise and delight business leaders and consumers.  As the day drew to a close it seemed as if the only ones to be surprised were the Federal Open Market Committee (FOMC) members themselves.  Consumers were not impressed!  The hoped for boost to the U.S. stock market last only a few minutes. 

Perhaps traders just did not want to be distracted from shopping on-line for face masks and self-quarantine supplies against the imminent threat of coronavirus.  Indeed, the prospect of a dramatic upheaval in the U.S. economy because of widespread illness and the efforts to contain it appears to be driving market sentiment even if the potential economic effect is lost entirely on policy makers. 

Indeed, the Federal Reserve action appeared to have just the opposite effect on investors and traders.  As the initial minutes ticked by, the implications of the FOMC decision began to sound alarms across trading rooms.  If the FOMC saw sufficient need to lower rates outside the usual meeting schedule, even after declining to take the action at earlier dates, the committee members must see something of significant concern.

Source:  Federal Reserve, 62-year Fed Funds Rate 

Federal Reserve Chairman Powell could not likely have found more disturbing words for his explanatory statement:  ‘evolving risk’, ‘material impact’, and ‘highly uncertain’.  It is also alarming that the FOMC thought they could lower rates by 50 basis points and all would be well even as they characterized the current economic situation as subject to unquantifiable risk.  It suggests this group of banking and finance experts do not have a full understanding of risk assessment.

There is never a time that risk is not present in an equity market.  Participants are constantly attempting to quantify risk and adjust prices accordingly.  When new information comes available that suggests risk is greater than previously measured, the market sells off. 

Perhaps the FOMC members and Power get it now.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.