The Federal Reserve cut its target federal funds rate last week by 25 basis points, half of the 50 basis points that Wall Street had hoped for. That came after significant pressure to cut in recent months, much of which came from President Trump, who has castigated the Fed for hiking rates in the first place. But the cut didn’t please stock markets, which proceeded to drop significantly over the next few days.
Part of the problem was that Fed Chairman Jay Powell was tremendously unclear in the post-meeting press conference about where the Fed might go from here. While markets want the Fed to keep cutting at future meetings, Powell initially characterized the cut as a mid-cycle “adjustment,” rather than the first in a series of cuts.
When pushed later in the press conference, he claimed that it wasn’t a one-and-done cut, but rather that the Fed would wait for more data before determining whether or not to cut rates again or halt. In all, it was a bungled job of communication, not a good effort in an economy that has become completely reliant on central bank largesse for its continued survival.
You have to wonder what the Fed is thinking, as it appears policymakers have completely lost their mooring. Pushed by President Trump and Wall Street to cut rates, while internal dissent is pushing for no cuts due to already high stock markets and asset prices, and you have a severe risk of the Fed doing something just for the sake of doing something to shut up its critics, regardless of what the consequences may be.
That’s not good for investors, savers, or anyone else for that matter. Far from being a guarantor of financial stability, the Fed is quickly becoming the number one source of financial instability. It already sowed the seeds of the next financial crisis in response to the last one, and its current policy missteps will only hasten the coming of a market crash.