Why the Markets Dissed the Fed. Again.

Just half an hour before the Federal Open Market Committee made one of its periodic and always much-anticipated interest rate announcements, stocks were slightly up. Soon after the announcement, they fell and finished down on the day—the Dow swung about 200 points from its pre-meeting peak to the closing bell.

So what were investors upset about this time? In the recent past, the markets have apparently been “disappointed” that rate cuts weren’t bigger or more frequent. You could say the markets believed the Fed was being too cautious. But at this point the federal funds rate has fallen all the way to 3.5 percent, as low as it’s been since 1994.

Today’s wisdom is that the markets think the Fed is being too pessimistic. How so? Well, it’s fine that rates got cut another quarter of a percentage point, but what traders were really focused on this time around (the thinking goes) was the short statement that the FOMC makes each time it announces its rate decision. This statement includes the committee’s “bias,” basically a nonbinding heads up on how it sort of feels about things in general—we might have to cut rates again, we think we won’t cut rates next time, our next move is likely to be a rate increase, etc. (The language is less casual than that.)

Apparently the market wanted soothing words: It’s OK everybody, the worst is over, we’re probably done here, just sit back and let our months of cutting do its magic. That’s not what the markets got. The FOMC left open the distinct possibility of cutting rates again. The alarming phrase seems to be this one: “The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.” That is, the worst may not be over.

There’s a good chance that this is correct—that there will be more layoffs and shrunken profits and general pain before we start to feel a rebound. Would that be a surprise? I doubt it. It seems likely that most investors right now have the sense that profits aren’t going to explode tomorrow morning. So what difference does it make if the Fed basically agrees with them and figures it’s best to be prepared for more bad news and ready to act in the face of it? It sounds reasonable enough to me. But I guess what those investors wanted wasn’t a reasonable statement, but a hopeful one. Then again, maybe the market would have found a way to disapprove of that sentiment, too. Investors are a mighty tough crowd to please these days.