If you are looking for someone to blame for the sharp market sell-off this morning, you can point your finger at the US Federal Reserve chairman Jerome Powell.
He miscalculated when it announced a shock 50 basis point cut to the federal funds rate (the US official interest rate) last night.
The decision to make a larger than normal reduction to the rate wasn't a surprise. It was the timing and lack of reassurances from Powell.
Brace for a big fall
The news sent key US stock indices, including the S&P 500 plunging by around 2%. It's almost certain that the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index will follow suit when market opens this morning.
So, what went wrong? Rate cuts are meant to help markets – just look at the positive reaction the ASX got yesterday when the Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points.
The big banks Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) were the exceptions. Their stocks fell as they succumbed to political pressure and passed on the full cut to borrowers. This means skinnier margins for the big lenders, but hey, that's worth the sacrifice for their past transgressions.
Mistiming weakens confidence
Unfortunately, the rest of the market will feel the pain from the Fed this morning as the US central bankers voted unanimously to slice the rate in an out-of-cycle meeting. It's very unusual for a central bank to adjust the interest rate outside of their scheduled meeting – and it smacks of desperation.
The key message to investors is simple – if the Fed is panicking, you'd better be as well!
What's worse, Powell, and the rest of the market, knows rate cuts won't help the real economy. It can only reassure investors. But the desperate move did anything but!
This isn't the first time the Fed chair miscommunicated to the market too. It looks like Powell is still on his "Ls".
Foolish takeaway
It now rests on politicians to rescue us, and lord help us all!
Our Prime Minister is said to be working on a plan in the background to help stimulate the economy. Economists aren't sure exactly what fiscal help will be offered but expectations are it won't be as generous as cash handouts the Hong Kong government has undertaken.
It is more likely to be tax breaks for businesses to hang on to employees during the next few difficult months. This in itself may not do much for our sagging share market, but if the federal government goes above and beyond, that could be a very different story.
Keep your fingers crossed fellow Fools!
