Emergency Fed action takes traders by surprise

As a preventative measure, the Federal Reserve today announced that they implemented an emergency move by having the central bank cut interest rates prior to the next FOMC meeting which will be held on March 18. Without any question this move is extremely rare to implement any monetary change prior to a FOMC meeting.

The Fed stated their decision was unanimous, and this decision occurred shortly after the G-7 finance ministers and central bankers promised to use all available tools to battle the slowdown caused by the disease (corona virus).

According to a statement released by the Fed, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

After the statement was released chairman Jerome Powell held a press conference in which he stated “Officials saw the virus spreading and this represented a material change in the outlook for economic growth.” He also expressed the rationale for the Fed initiating this emergency move, “We’ve come to the view now that it is time to act in support of the economy. Once we reached that decision, we decided to go ahead.”

The chairman also said that he believes “that our action will provide a meaningful boost to the economy.”

However, market participants, traders and investors were not so convinced. That proof is in the fact that U.S. equities were trading higher prior to Jerome Powell’s press conference and then began to selloff as he made his announcement and the rationale behind it.

The Dow hit a high today of 27,084.84, but it closed at 25,917, after factoring in today’s decline of 786 points which is just shy of a 3% loss on the day.

The 3% decline in the Dow is almost equal to the price gains in gold today of 2.76%. Gold futures bases the most active April contract gain $44 on the day and closed at $1638.80. While the upside move in gold in response to the emergency action by the Federal Reserve was logical and within expectations of how the safe haven asset would react. The same cannot be said for U.S. equities which were initially higher but sold off dramatically to the same information. Typically, when the Federal Reserve cuts rates it is bullish for both risk on and safe haven asset classes. That did not occur today.

Wishing you as always, good trading,

 

 

 

By Gary Wagner
Contributing to kitco.com

 

David