Trader Talk

Market Lowers Expectations For Further Rate Cuts

The markets got the rate cut they wanted, but the Fed signaled an increased concern with inflation, and the market is responding by ratching down its expectations for further rate cuts.

But the Fed also noted that "economic growth was solid" (a nod to the stronger than expected GDP growth of 3.9%), and that "the strains in the financial markets have eased somewhat." This is not bad news, since the whole name of the game with rate cuts was to help out the U.S. economy. As Tony Crescenzi noted: "the markets will gladly trade rate cuts for signs that the economy was skirting recession."

The bear outlook is that the Fed has cut 75 basis points in the past six weeks, but all it has done is weakened the dollar and fueled inflation. They point out that since the Fed began cutting September 18th: banks are down 2.3%, homebuilders are down 1.5%, but materials are up 10.7%, techs are up 10%.

Those are the two sectors with big international exposure that would benefit from the weakened U.S. dollar. But the groups that need help the most--builders and financials--don't seem to be responding much to the Fed easing.

Questions?  Comments?