The Fed cut rates by half a point today.
And they project another half point cut by year end.
And it has everything to do with the employment situation.
We've talked for months about the clear "cracks" in the labor market. And the Fed told us back in March that unexpected weakness in the labor market was a condition for a policy response.
And yet they did nothing while watching the unemployment rate rise at a rate-of-change consistent with the past four recessions, and (in each case) consistent with a Fed easing cycle.
So they come in today, not with just a cut, but a large cut, and projecting another 50 by year end, and another 100 basis points by the end of next year.
What signal should the market take from this?
We don't have to guess. Jerome Powell told us what signal he wants the market to take from this. He said, they don't think they are behind the curve, and that this "strong move" should be taken "as a sign of our commitment not to get behind the curve."
Translation: If the job market deteriorates further, he says "we have the ability to react to that by cutting faster."
So, how did markets respond?
It should have been stocks up, yields down, commodities up, dollar down.
What happened?
Stocks: Up first, then down.
Yields: Down first, then up.
Commodities: Up first, then down.
The dollar: Down first, then up.
This outcome for markets, by end of day, was the opposite of what you might expect for a Fed move that lightened the brake pressure on the economy, and with plenty of promises that they will do what it takes — that they are "committed to a good outcome" (i.e. stabilizing the labor market and averting an economic downturn).
This odd market behavior brings us back to my July 31 note, just following the Fed's last meeting.
Given the Fed's reluctance to move in that July meeting, despite the obvious drag that rates were having on the economy, and the clear weakness that had developed in the labor market, I asked: Are they not moving because they are worried about the dollar (i.e. preserving global capital flows to protect the dollar)?
As we now know, the sharp unwind of the carry trade accelerated the next day, leading to a sharp drop in the dollar. It was only stabilized by verbal (and likely actual) intervention from the Bank of Japan.
Today's Fed news was clearly dollar bearish. Yet, the dollar went up.
Are the Fed and the Bank of Japan coordinating to maintain stable markets? Likely.
