Following the interest rate cut of 25 basis points by the Federal Reserve, oil began by falling below $65 a barrel on Thursday, and fell for the first time in six days. For the markets hoping that future rate cuts could be on the way, Powell dashed their hopes by saying it wasn’t the trend, but merely a “mid-cycle adjustment.”
“That refers back to other times when the FOMC has cut rates in the middle of a cycle and I’m contrasting it there with the beginning of a lengthy cutting cycle. That is not what we’re seeing now, that’s not our perspective now,” Powell said. “You have to look at not just the 25 basis-point cut, but look at the committee’s actions over the year.”
“We started off [the year]expecting some rate increases. We then moved to a patient setting for a few months and now we’ve moved here,” Powell added. “As we’ve moved to more accommodative policy, the economy has actually performed as expected with that gradual increase in support.”
The markets may have already priced in a rate cut, leading to sell-offs following news of the cut. Additionally, the cut acknowledges that the central bank is aware of the looming risks in the economy.
“The Fed has capitulated to softer economic growth. Inflation is headed lower, but recession is unlikely,” said David Abramson, chief U.S. strategist at Alpine Macro, in a note. “Policy reflation should put a floor under stock prices and sustain the forward earnings multiple, even as overall profit momentum fades in the coming months.”
Brent crude fell below $65 while West Texas Intermediate (WTI) crude headed below $58.
“A relatively upbeat mood in risky assets took a spectacular U-turn after last night’s Fed decision,” Tamas Varga of oil broker PVM said. “The dollar started to strengthen and equities and oil went into a kind of meltdown mode.”
In the meantime, global supply and demand forces are weighing in on oil prices.
“Supply is plentiful and demand growth is showing signs of weakening globally because of trade conflicts, Brexit and other events that tend to potentially weaken economic growth and, hence, oil demand,” Victor Shum, senior partner at IHS in Singapore, said.
“There’s a lot of oil out there. U.S. output is growing strongly.”
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