In a masterful move, yesterday the Fed lowered interest rates without lowering interest rates. Investors have been pumping social media, forums, and newsletters with comments about how stock prices are headed significantly higher, how bond prices are headed significantly lower, and how crude oil prices are headed higher. Given the weak trading volumes the week prior to the Fed announcement, the markets decided to give investors what they wanted.
This morning the S&P 500 and Dow Jones Industrial Average opened at or near their all-time highs, before setting new all-time highs. Treasury yields fell and hung out on a technical cliff, crude oil prices bounced off support, and gold prices move right over a major technical resistance level. This left a few questions – are investors holding back until stock prices make new all-time highs to buy? Or are investors holding back cash until the FOMC meeting was resolved? Or are investors out of cash and hoping to lure other investors in? Over the next few days, those questions will be answered.
The Fed used forward guidance to give investors a rate cut without cutting rates. The Fed suggested they might lower interest rates if warranted, which everyone interpreted as a guarantee that the Fed will cut next month. The Fed even used its dot-plot tool to give investors the indication that the committee was split and could end up cutting rates. Yet, the Fed has no intention of cutting rates until they must!
The Fed knows that consumer spending tends to increase when the stock market increases, or what’s known as the wealth effect. All the Fed had to do was convince investors, consumers and businesses they may cut, to spur economic activity. Should economic activity pick up on the belief the Fed will cut, the Fed can simply postpone the rate cut as long as possible. After all, the Fed is fully aware that they lack the necessary policy tools to stave off the next recession, so they need to use any and every tool at their disposal to convince the public to borrow and spend.
The Philadelphia Fed business outlook survey followed the Empire Fed survey lower. The Philly Fed survey came in at 0.3 in June, after hitting 16.6 in May. Both prices paid and prices received fell, suggesting the Fed’s two-percent inflation target is a long way off.
Everything closed higher, which is not normally how the stock market works. Tomorrow is quadruple witching day, where options and futures contracts are set to expire. On these days, large quantities of shares are traded in rapid fashion as winners and losers settle their bets. It is not unusual going into quadruple witching day that markets rise as betters attempt to push prices in the direction they want.