Financial markets were expecting some clarity on monetary policy from the United States Federal Reserve when it announced a widely expected 25-basis-point cut in its Fed Funds rate on Wednesday to 2 per cent to 2.25 per cent. But they did not get much. Having telegraphed the cut loud and clear for weeks, citing below-target US inflation, low global growth and trade-related uncertainties, Fed chairman Jerome Powell had raised market expectations of a new easing cycle after nine interest rate hikes since December 2015. It was also to be the first interest rate cut since the global financial crisis. But when announcing the cut, Mr Powell described it as a "mid-cycle adjustment", making clear that this was not the beginning of a long series of rate cuts - although he added that he was not saying there would be just one cut.
Markets, which normally rally after rate cuts because these lead to lower borrowing costs and higher stock prices, instead took fright. Key US stock indexes fell by more than 1 per cent, while US Treasury yields went up. The US dollar also strengthened against other major currencies, which is also atypical after a rate cut. Mr Powell might have disappointed markets by appearing more hawkish than they expected, but his ambiguous forward guidance is understandable. On the one hand, the US economy is in decent shape, with economic growth running at an annual rate of more than 2 per cent and unemployment at a close to 50-year low. These positives should normally give the Fed pause when considering a rate cut. And indeed, it was notable that two out of the 10 governors on the Federal Open Market Committee voted against the cut. On the other hand, the factors Mr Powell cited as being threats to the US economy's continued expansion - and which the rate cut is supposed to insure against - show no signs of abating. US core inflation, which excludes food and energy prices, is at 1.6 per cent, well below the target rate of 2 per cent. The rise in the US dollar would, if anything, send it even lower.