Need to Know: Here’s how the Fed could rattle the market instead of calm it down

It’s finally here — the day that U.S. interest rates get lowered for the first time in a decade. According to Bespoke Investment Group, it has been 3,878 days since the Federal Open Market Committee last cut interest rates. That 10 ½-year streak is the second-longest on record, behind only the 4,115 days with no such move in the 1950s. Not everyone is thrilled with the expected rate cut that’s been repeatedly flagged in Fed speeches and long priced into markets. Drew Matus, chief market strategist at MetLife Investment Management, is in the camp that argues the Fed would be better off hiking interest rates than lowering them. The latest GDP data showed consumers spending aggressively, and yet the savings rate is about 8%. “So if there is a negative shock to the U.S. economy, the Fed would have time to respond because the consumer could buffer themselves with the high level of savings,” he told MarketWatch. Matus has resigned himself to a quarter-point “insurance” cut on Wednesday, which he concedes probably won’t do much to hurt or help the economy. What he doesn’t want to see is an early end to the Fed’s balance-sheet reduction plan, which is scheduled to end in September anyway. Related: Here’s how the stock market tends to perform when the Fed cuts rates “The only reason to do these rate cuts is to calm down markets,” he said. “If you end the program abruptly after you told people it’s going to end in September, is that calming to the market? Or does that create another source of uncertainty,” he asked. When Fed Chairman Jerome Powell addresses reporters, he may try to make the case that the rate reduction is a one-time thing that could even get reversed depending on how the economy performs. The Washington Post pointed out that a number of former Fed officials — notably two former chairs, Alan Greenspan and Janet Yellen — have publicly said they support just one rate reduction. The market is pricing in at least two rate cuts by the end of the year. The market U.S. stocks opened higher, helped by well-received results from Apple and General Electric as well as anticipation of the Fed cuts. The Dow

DJIA, 0.21%

  ended slightly lower on Tuesday.  Gold

GCQ19, 0.03%

  and oil futures

CLU19, 0.53%

  rose. The ICE U.S. Dollar index

DXY, 0.01%

 was higher. Europe stocks

SXXP, 0.07%

were little changed, while Asia

ADOW, -0.97%

finished lower. The chart To really think about why the Fed is cutting interest rates, consider that some $12 trillion of dollar-denominated debt is outside the U.S. The Bank for International Settlements on Wednesday pointed out that dollar credit to non-bank borrowers outside the U.S. grew more slowly than inside the U.S. for the third straight quarter. Much as it doesn’t like the label, the Fed is central bank to the world — and the world is struggling.

The buzz It’s a huge day on the economics calendar. The Fed decision comes at 2 p.m. Eastern, and Powell’s press conference is at 2:30 p.m. Also on the economics front, ADP reported 156,000 private-sector jobs created in July, and employment costs rose 2.7% over the last 12 months, according to data released in the morning. The Treasury Department said it will gradually increase the bill supply once the budget deal that suspends the debt ceiling is signed into law. On the corporate side, Apple

AAPL, 4.87%

  will be the focus after encouraging guidance and improvement out of China. “We would characterize this quarter/guidance as a major feather in the cap for the bulls that should drive the stock to new highs over the coming months despite many peers yelling fire in a crowded theater on the name over the past few months,” analysts at Wedbush said. Read: Apple heads back toward $1 trillion territory after earnings beat, optimistic forecast General Electric

GE, -0.24%

  reported second-quarter earnings and revenue that were higher than consensus. The tweet Does financial engineering work? Maybe for Apple. It’s on track to earn as much this year as in 2015 — but look how much the stock has climbed.

Apple net income is on track to be the same this fiscal year as in 2015 – about $53B. EPS this year is set be up ~20% from 2015, given the company’s bought back ~1B shares – and it still has $200B in cash. The stock has done this. So, yes, financial engineering works.— Michael Santoli (@michaelsantoli) July 30, 2019

Random reads Marianne Williamson, who spoke of “dark psychic forces,” was the most searched candidate on Google who participated in Tuesday’s Democratic presidential debate. Yikes — no climate event in 2,000 years compares to what’s happening now. Here’s what Walmart’s

WMT, -0.45%

  store managers make. There are contact lenses that zoom in or out if you blink twice. Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern. Follow MarketWatch on Twitter, Instagram, Facebook.



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