U.S. Stocks Slam on the Brakes as Fed’s Powell Expects Coronavirus to Disrupt Global Economy

Posted in: Market News
January 29, 2020 9:55 PM UTC

The U.S. stock market remained on firm footing Wednesday afternoon as the Federal Reserve voted to keep interest rates on hold.

  • The Federal Reserve voted on Wednesday to keep interest rates on hold.
  • Stocks extended their rally post-FOMC but later declined as Chairman Jerome Powell expressed concerns over the caronavirus outbreak.
  • Traders are skeptical about the Fed’s claim that rates will remain on hold this year.

The Dow and broader U.S. stock market finished mixed on Wednesday after the Federal Reserve kept interest rates on hold in its first policy decision of 2020.

Stocks Settle Mixed

All of Wall Street’s major indexes traded in positive territory Wednesday afternoon before giving back gains later in the session. The broad S&P 500 Index of large-cap stocks settled down 0.1% at 3,273.40, with most of the losses concentrated in energy and consumer staples companies.

The S&P 500 Index buckled late Wednesday to finish down 0.1%. | Chart: Yahoo Finance

The Dow Jones Industrial Average finished up 11.60 points, or 0.04%, at 28,734.45. The blue-chip index was up more than 200 points earlier in the day.

Meanwhile, the technology-focused Nasdaq Composite Index advanced 0.1% to 9,27.16.

Fed Holds the Line on Monetary Policy

Members of the Federal Open Market Committee (FOMC) voted on Wednesday to keep the target for the federal funds rate at 1.5% to 1.75%, unchanged from December. Central bankers remain dovish on interest rates despite signaling no more cuts for the rest of the year.

Before the decision, Fed Fund futures prices implied an 85% chance that rates would remain unchanged.

In reaching their decision, policymakers said “the labor market remains strong” and “economic activity has been rising at a moderate rate.” On the flip side, “household spending has been rising at a moderate pace, business fixed investment and exports remain weak” and “market-based measures of inflation compensation remain low.”

Although the Fed has tempered expectations about further rate cuts, traders aren’t buying it. Fed Fund futures prices imply 58.5% chance that rates will fall by the September FOMC meeting. That likelihood goes up to 65.2% in November.

The likelihood of another Federal Reserve rate cut goes up drastically in September, according to CME Group’s FedWatch tool. | Chart: CME Group

The Fed may have put a temporary freeze on rate cuts, but it continues to prop up the financial system with fresh bursts of liquidity. On Tuesday, the Federal Reserve Bank of New York conducted its latest repo operation, adding $84.7 billion to the money markets.

As of last Wednesday, the Fed’s balance sheet was valued at $4.15 trillion, down $29.9 billion from the week before. The balance sheet stood at around $3.8 trillion in September just before the latest repo mania began.

Powell Expresses Concerns Over Caronavirus

Jerome Powell’s post-FOMC press conference rattled investors after the Fed Chair expressed concerns about the coronavirus epidemic.

“It’s a serious issue. There is likely to be some disruption of activity in China and probably globally,” Powell said, according to MarketWatch.

He added:

We’ll just have to wait to see what the effect is globally.

The death-toll from the flu-like illness has risen to 132, with more than 5,900 cases in China alone. In the United States, more than 100 people are being tested for the virus across 26 states.

Disclaimer: The above should not be considered trading advice from CCN.com.

This article was edited by Josiah Wilmoth.

Last modified: February 3, 2020 9:30 PM UTC

Sam Bourgi @forgeforth87

Financial Editor of CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance and Forbes. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com

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