Posted by: Aaron Pressman on April 30, 2008
The Federal Reserve pretty much did as expected today, cutting the benchmark fed funds rates to 2% and signaling a lessening desire to cut rates much more. Right? At least that’s the media spin. And the stock market, which had rallied ahead of the much anticipated actions, initially took the news in stride and rallied a bit more. But the rally quickly topped off and all the major indexes finished the day with losses. The S&P 500, which closed around 1391 on Tuesday, hit a high water mark of 1404.57 before tumbling back to 1385.59 at the close. That’s a 1.4% drop in the last hour or two of trading. Ouch.
But if the Fed did just what everyone expected, why the sell-off, why the disappointment? Start by looking at the evidence. What sold off and what didn’t? A quick check of the Wall Street Journal’s sector watch shows energy and basic materials stocks ended the day with gains. Retailers, homebuilders, financials and tech stocks got smooshed. Gold stocks were particularly strong, up 3%, as the dollar fell against all major currencies. Yields on bonds also declined. So what didn’t add up in today’s Fed move? The big pause signal seems to have gotten obscured by some static.
If the Fed isn’t pausing and may cut rates again soon, inflation could rise further and fewer investors will be attracted to keep their money stashed in dollar deposits. That seems to be the message of higher prices for gold and stocks of materials and energy producers. A weaker dollar and lower bond yields also signal anticipation of further rate cuts. The market’s also not showing much confidence that the Fed has a handle on the financial sector, though news and earnings reports from banks and brokers were mostly bad throughout the day.