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Federal Reserve Cuts Rate for the First Time in a Decade

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In a fast market, traders reacted to the news that the Federal Reserve has lowered interest rates by ¼%. Immediately following the announcement of the ¼% rate cut gold prices sold off briskly and within the first 10 minutes of trading traded down by approximately $10. This is the first time the Federal Reserve has cut interest rates since 2008. They also ended their balance sheet reductions two months early.

As quick as the market sold off it quickly recovered temporarily and actually traded with positive gains for a brief instant. However, as traders absorbed the statement that was released just prior to the press conference held by Jerome Powell gold prices reversed again with increased downside pressure.  Gold futures traded to the lowest price of the day at $1422 per ounce, this basis the October futures contract.

Chairman Powell’s press conference did not change the overall demeanor of market sentiment as he attempted thread the needle. The Fed Chairman said that Fed members focused on a “mid cycle adjustment” and focused on the fact that over this last year the monetary policy has pivoted from a series of interest rate hikes, to a neutral stance, and finally a key reversal in which they cut rates rather than raised them. When asked if there will be more rate cuts this year Powell said that the Fed also leaves the door open to future cuts saying that they will “Act as appropriate to sustain the expansion”.

Midway through the press conference Chairman Powell said that the Fed was not embarking on a long rate cutting cycle as in a recession. However, he backed off of that statement later in the press conference when he said, “Let me be clear: what I said was it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that. When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that.”

The Dow Jones industrial average fell 478 points at its low, and as of 4:10 PM EDT is currently trading down 333.75 points and fixed at 26,864.27. Gold is also trading off of the intraday lows, but current pricing has kept October futures under pressure and are currently trading down by $16.00 at $1425.70.

Given that the Federal Reserve cut rates as anticipated by ¼% rather than a ½% sent U.S. equities as well as gold and silver strongly lower however they did hint at the fact that they might cut rates again this year to insulate and continue the U.S. economic expansion by stimulating the economy with further rate cuts this year.

“As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,”.

While it is clear that today’s action by the Federal Reserve was not as accommodating as hoped for by traders it must not be overlooked that this is the first time in over a decade that the Federal Reserve has reversed its stance of quantitative tightening. Chairman Powell focused on the fact that there has been a slow and methodical reversal in their monetary policy which began this year when they first stopped raising interest rates, to today’s action of actually cutting rates. This key reversal in monetary policy cannot be overlooked and taken lightly. Today’s rate cut certainly confirms that the Federal Reserve has and will continue to take action to support the economic expansion in the United States. That being said it is highly likely that the Fed will cut rates at least one more time this year either in September or December.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer