The Fed Interest Rate Pause That …

Distresses? Refreshes? Isn’t important?

Today, as expected the Federal Reserve cut the benchmark interest rate for the third time this year. The Fed lowers its benchmark rate 25 basis points to a range of 1.5% to 1.75%.

At the same time the Fed signaled that it would pause after this cut, the third reduction in a year. Fed chair Jerome Powell said that, if the economy continues at the pace the Fed now forecasts, the central bank could stand pat and not cut rates further. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” he said. “If developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a pre-set course.”

The markets today reacted as if 1) they believed the Fed, and 2) they had expected this result.

The CME FedWatch Tool, which calculates the odds of a Fed move from prices in the Fed Funds futures market, saw the odds of a fourth cut, at the December 11 meeting, drop to 0%. The odds of an interest rate cut at that meeting had been 17.2% yesterday and 30.6% on October 23.

The Standard & Poor’s 500 closed up 0.33% at 3,046.77. The index had been at 3,031.41 at 2:39 p.m. after the Fed announcement and then edged steadily higher to the close.

The Dow Jones Industrial Average finished the day up 0.43%; the NASDAQ Composite was higher by 0.33%; and the Russell 2000 small cap index fell 0.27%.

After the Fed’s interest rate cut today, rates are at the same level as they were in the spring of 2018. The Fed raised interest rates four times in 2018 to near 2.5%.