Fed, trade confusion upending Wall Street investment playbooks

02 Aug, 2019

At issue was one of Wall Street's oldest play books: "Don't fight the Fed." Investors have long taken cues to buy or sell equities from the Fed's decisions to revive or cool the economy by adjusting short-term interest rates.

Yet for the first time since the financial crisis, voting members of the US central bank appear to be at odds over their interpretation of financial data and the Fed's responsibility to act, leaving investors guessing as to what the Fed is basing future rate decisions on.

President Donald Trump, who has been lambasting Powell about not lowering interest rates fast enough, unexpectedly announced an additional 10% tariff on Chinese goods Thursday, possibly putting additional pressure on the Fed to cut rates aggressively.

Powell has repeatedly said the central bank makes decisions independently from markets and the White House. On Wednesday, he described the widely-telegraphed 25 basis point rate cut as a "midcycle adjustment" in response to signs of a global slowdown, simmering US trade tensions and a desire to boost too-low inflation, before leaving the door open to additional cuts depending on future economic data.

During those 18 minutes of confusion, the benchmark S&P 500 plunged 1.75%, representing a market value loss of $461.7 billion, according to Refinitiv data.

Two Fed members dissented from the Fed's rate cut, the first time since at least 1998 the initial vote to lower rates in a cycle was not unanimous. With the Fed split at a time of decades-low unemployment and other signs the US economy continues to expand, equity and fixed-income fund managers say they are left with few clues to gauge the next move from the world's most powerful central bank.

"We've been trying to come up with historical analogies and we just can't find one. This makes this market very unique and it's one of the reasons why you had the muddled if not messy reaction to the Fed decision," said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.

As a result, Jacobsen said he is focusing on higher-quality equities and corporate bonds, rather than the companies with weaker balance sheets that would typically benefit the most from a reduction in interest rates.

Copyright Reuters, 2019

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