Fed Cuts Interest Rates as Expected, But Markets Go Nuts

There weren’t really any surprises last week when the Federal Open Market Committee decided to cut its target federal funds rate another 25 basis points, to a target of 1.75% to 2.00%. That had long been expected and even priced in by many investors. But there were two anomalies that bear mentioning.

The first is that there were three dissenting votes to the FOMC’s policy announcement. Those dissenting votes this time around were St. Louis Fed President James Bullard, who preferred a 50 basis point cut, and Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, both of whom favored keeping rates where they were.

That’s only the fifth time in the past 25 years that there have been three dissenting votes at an FOMC meeting. It also marks an escalation, as the last meeting saw two dissents and the meeting before that saw one. Will the next FOMC meeting see four dissents?

It’s important to remember that President Trump also has two vacancies on the Federal Reserve’s Board of Governors that he needs to fill, so for all his complaining about the Fed being too tight on monetary policy, he has the ability to change that through his picks for the Board.

The other curious anomaly last week was that overnight repo market interest rates spiked up to nearly 10% at one point. That’s significantly higher than normal levels, which generally at their highest are only a few basis points higher than the target federal funds rate.

That interest rate spike required the Fed to step in with emergency liquidity funding which may now become a permanent fixture of repo markets. There’s a variety of speculation as to why that interest rate spike occurred, with much of it focusing on the possibility of hedge funds or other leveraged borrowers being badly in need of overnight funding.

Whatever the reasons, the fact that the Fed allowed interest rates to get out of control, if even for a short period of time, is a worrying sign that debt markets are at great risk. The likelihood of a complete freeze as we saw during the financial crisis is increasing all the time.

Many investors who see these events in markets are understandably worried and taking steps to make sure that their assets remain safe in the event of a complete market meltdown. That includes diversifying their portfolios away from stocks and investing in gold to protect their precious retirement assets. It’s becoming increasingly clear that the world financial system is on shaky ground, and time is running out for investors to safeguard their savings before the next crash occurs.