Equity markets fell sharply following the Fed's 0.25% cut to its federal funds target overnight rate. The S&P 500 index was off about 40 points, while Treasurys rallied.
Some economists saw the drop as an indication traders were looking for a 0.5% cut, despite the nay-saying of an overwhelming majority of economists. To wit, while a full 115 out of 124 economists surveyed by Bloomberg anticipated a 0.25% cut, CBOT futures indicated that a 0.25% cut was fully discounted, while the odds of a half-point reduction were 28% prior to the move.
"By cutting by only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as what market participants believe. In other words, the Fed sees recession risk as being less than 40 percent whereas the market sees recession risk as at least 40 percent," Moody's chief economist John Lonski said.
Others felt the selloff was due to a more hawkish than expected economic outlook.
"The rate decision and the Fed statement are more hawkish than market expectations and this should be bearish for equities and bearish for dollar/yen as well, but bullish for the dollar against the euro. This should accelerate the euro's downside against the dollar," JPMorgan Chase's Ken Landon said.
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