Another Fed Rate Cut! What does this Mean?

Here is information provided by our wonderful lender;
Kevin Cavalli @ Village Funding


Stocks were flat on Thursday morning as disappointing profit by Exxon Mobil Corp and data pointing to employment weakness offset optimism about a pullback in oil and other commodity prices as the dollar rebounded. The Fed did lower key interest rates another .25 yesterday as expected; however, I wouldn’t count on any future “scheduled” relief. Take a look at the following blurb for more details:

For Dollar Bulls, the Federal Reserve Fails to Deliver
The Federal Reserve cut interest rates by 25bp to 2 percent, which was right in line with the market’s expectations. However the US dollar sold off because the market was disappointed that the central bank did not give them more. This appears to be a classic buy the rumor sell the news type of reaction in the greenback since the statement was undoubtedly more hawkish than the one released in March. We noticed 3 major changes in the statement; First, two members voted to keep interest rates unchanged. Although Plosser and Fisher dissented last month as well by favoring a smaller rate cut than the 75bp of easing delivered on March 18th, they could soon convince some of their peers to follow suit. Secondly, the Fed took out their promise to act in a “timely manner” and instead, they simply said that they will act as needed. The statement about the downside risks to growth is also gone and even though we do not believe that the downside risks to growth have really disappeared, taking these words out of the statement is symbolic. Finally, the Fed reminded the markets that they have eased interest rates substantially (325bp since August) and over time, their efforts should have an impact on the US economy. For all intents and purposes, the Federal Reserve is telling the markets that the economy needs time to absorb their rate cuts and their toned down statement suggests that they will not be cutting interest rates again in June. The futures market is currently pricing in a 78 percent chance that interest rates will remain unchanged at the next Fed meeting and a 73 percent chance that interest rates will also remain at 2 percent in August. Yet the US dollar sold off because the market is not confident in the Fed’s judgment. This morning’s Chicago PMI report and GDP reports were better than expected, but non-farm payrolls on Friday should be weak. So far, the central bank’s rate cuts have only had a limited impact on the US economy. It takes time before the monetary stimulus can be felt, but if it does not come through soon, an accelerated deterioration in the US economy could force the Federal Reserve to pick up where they left off. The FOMC statements have become longer and longer in recent months and the central bank’s increasing need to explain themselves can be worrisome for dollar bulls. A number of US economic data are due for release tomorrow. Manufacturing numbers should be dollar positive.


Kevin Cavalli
Senior Mortgage Consultant
Banker/Broker
Village Funding Inc.
O - 775.327.4508 ext. 127
F - 775.824.3642
C - 775.722.1323