Easing Does It

Fed update

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What's going on?

The Federal Reserve (the Fed) cut US interest rates on Wednesday, as 84% of investors expected – but that might not be enough to keep them satisfied.

What does this mean?

The Fed lowered its “fed funds rate” target by 0.25% on Wednesday. That target helps determine the interest rate used for super short-term borrowing – a few hours, overnight – when banks move money among themselves in order to keep enough cash on hand and meet regulators’ standards. And since interest rates for longer borrowing periods are linked to this benchmark, US loans should now become cheaper so as to encourage economy-boosting spending. But, as investors are all too aware, a target – even one set by the Fed – can be missed. And that’s what happened this week (tweet this)…

Why should I care?

The bigger picture: Divine intervention.

US commercial banks don’t appear to have had enough cash in reserve this week to lend to other banks in overnight transactions (a.k.a “repo markets”). The shortage – for which the Fed may be partly to blame, having slowed down its own bond purchases earlier this year – pushed the aforementioned short-term interest rate above the Fed’s target. That led the US central bank to inject its own cash into the market – for the first time since the financial crisis – in order to push the interest rate back into line, which may have spooked investors.

For markets: Companies and investors at odds.

All else equal, lower rates should help companies generate higher profits. But Wednesday’s cut was expected and likely already “priced in” to companies’ stocks. Company finance chiefs aren’t expecting any further cuts this year, dovetailing with the Fed’s thinking. But investors are hungry for more: as many as half think the Fed will bow to pressure from the US president and lower interest rates again this year – potentially giving the country extra leverage in its trade negotiations with China.

Originally posted as part of the Finimize daily email.

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