Markets were primed for last week’s rate cut by Reuters

By Michael S. Derby

NEW YORK (Reuters) – The central bank official in charge of implementing monetary policy at the New York Federal Reserve said on Tuesday that financial markets were poised to correctly interpret a larger-than-expected interest rate cut as something other than a sign of trouble.

While futures markets haven’t fully priced in the Fed’s half-percentage-point rate cut last week, market data collected by the New York Fed indicated that investors “might interpret a 50 basis point cut as exactly what it was – a recalibration of FOMC (Federal Open Market Committee) policy towards a more neutral stance, which will help maintain the strength of the economy and the labor market while continuing to allow for further progress on inflation,” said Roberto Perli, manager of the Fed’s Open Market System. Account, in a text to speech.

Last week, the Fed, facing waning inflationary pressures and rising risks to the labor market, cut its overnight target rate range by half a percentage point to between 4.75% and 5.5% and set cuts additional 50 basis points at the end of the year.

At the Fed meeting, some worried that a bigger-than-expected Fed rate cut could signal the central bank’s concern about the outlook, rather than what it turned out to be: a move to pull back unnecessary policy tightness from economy.

The Fed also said last week it was continuing with plans to shrink its balance sheet.

Perli said in his speech “market information has clearly indicated for several months that market participants have understood well that there is no mechanical link between interest rate and balance sheet decisions.”