Dow Soars But Federal Reserve Descends Into Civil War

September 4, 2019 13:36 UTC

The Dow soared toward a blockbuster recovery on Wednesday after positive developments in Hong Kong removed one potential complication from the trade war landscape.

However, conflicting opinions on interest rate policy suggest that the Federal Reserve risks descending into civil war ahead of a closely-watched policy meeting this month.

Dow Whips Back Into Recovery Mode

All of Wall Street’s major indices rallied back from their deep Sept. 3 losses. As of 11:57 am ET, the Dow Jones Industrial Average had spiked 214.04 points or 0.82% to 26,332.06.

The Dow spiked more than 200 points on Wednesday. | Source: Yahoo Finance

The S&P 500 added 26.35 points or 0.91% to climb to 2,932.62. Ten of 11 primary sectors reported gains, with energy, technology, communication services, and industrials advancing at least 1.00%.

The Nasdaq outperformed, jumping 80.70 points or 1.02% to 7,954.86.

Hong Kong Protesters Score Crucial Victory, Boosting Outlook for Dow

The Dow and its peers shot higher because the Hong Kong protesters scored a key victory, persuading Carrie Lam to withdraw the controversial extradition bill that ignited the historic protest movement earlier this year.

Beyond restoring calm to Asian markets, a peaceful resolution to the protests would remove one hurdle to a US-China trade deal.

That’s significant, but the two countries have to get back to the negotiating table first. Bloomberg reported earlier this week that this is proving to be more difficult than one would expect, and Trump’s softening stance on China now appears to have been fleeting.

Even more concerning is the extent to which Trump is willing to go to “win” the trade war. CNBC reports that the president was so incensed at Beijing for raising tariffs on US goods that he told aides that he wanted to double current tariffs on Chinese imports.

He ultimately settled on a 5% hike on $550 billion worth of Chinese goods, but only after his trade team called in reinforcements from Wall Street to talk him back from the cliff.

Federal Reserve: Civil War?

Interest rate policy is leading to deep divides within the Fed. | Source: Shutterstock

Meanwhile, Federal Reserve officials continue to harbor wildly different opinions on interest rate policy, less than two weeks before a closely-watched Federal Open Market Committee (FOMC) meeting kicks off on Sept. 17.

Each of the warring Fed factions broadcasted its stance on Tuesday – within the span of one hour. First, St. Louis Fed President James Bullard said that the central bank should execute a 50-basis point cut at its upcoming policy meeting.

“We are too high,” Bullard told Reuters.

Almost immediately afterward, Boston Fed President Eric Rosengren said that not only was a 50-basis point cut too aggressive but also that he didn’t think a 25-basis point cut was warranted either.

“As long as we are growing around 2%, I don’t see nearly as much of a need for taking immediate policy action,” he said.

Both central bankers will vote at the September FOMC policy meeting.

Stock Market Eyes 25-Basis Point Cut

Right now, the market appears to be splitting the difference.

According to CME’s FedWatch Tool, the market has priced in a 100% probability of a September interest rate cut, with a 93% chance of a 25-basis point reduction.

The market expects the Fed’s warring factions will compromise and adopt a 25-basis point interest rate cut. | Source: CME

The market anticipates at least one more cut in 2019, with a roughly 41% expectation that the Fed’s target rate will end the year at 125-150, three-quarters of a percentage point below its current level at 200-225.

Click here for a real-time Dow Jones Industrial Average chart.

Last modified: September 4, 2019 15:59 UTC

@Y3llowb1ackbird

Josiah is the US Editor at CCN, where he focuses on financial markets. He has written over 2,000 articles since joining CCN in 2014. His work has also been featured on ZeroHedge, Yahoo Finance, and Investing.com. He lives in rural Virginia. Follow him on Twitter @y3llowb1ackbird or email him directly at josiah.wilmoth(at)ccn.com.