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Stocks Fall as Powell Signals Caution on Future Rate Cuts

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07/31/2019 | 03:25pm EST

By Gunjan Banerji and Lauren Almeida

Major U.S. stock indexes' losses steepened after the Federal Reserve said it would cut interest rates for the first time in a decade, as hopes for further rate cuts were dampened.

Some investors are betting on more than one rate cut this year, and while the Fed's policy statement left open the door for the central bank to cut rates again, Federal Reserve Chairman Jerome Powell suggested this cut wasn't the beginning of a long easing cycle. He also reiterated the Fed would continue monitoring incoming economic data. Those statements could pare investors' outlook on further rate cuts.

The S&P 500 fell 1.1% in recent trading as Mr. Powell spoke. The Nasdaq Composite dropped 1.2%. The Dow Jones Industrial Average lost more than 300 points, or 1.2%.

Major stock indexes have rallied this year, fueled by the prospect of the first rate cut. The end of the meeting marks a pivotal moment for stocks, bonds and currency markets because of potential clues about what comes next, especially with interest rates already historically low. This cut marks just the fifth time in the past 25 years that the Fed moved to trimming rates from increasing them.

The Fed's policy statement showed that the global economy cast a shadow over the central bank's outlook. Mr. Powell also cited trade tensions as having a significant effect on the economy in his press conference.

"We're entering a period of slower economic growth," said Ben Kirby, a portfolio manager at Thornburg Investment Management.

Much was at stake ahead of the meeting, analysts said. High expectations ahead of the decision meant that the Fed's outlook and wording on further rate cuts could threaten the recent stock rally. Stocks sold off after the policy statement was released, and losses deepened after Mr. Powell said that the central bank's cut was a "mid-cycle adjustment to policy."

The prospect of an interest-rate cut this year also confounded some investors, who point to major U.S. stock indexes near records and unemployment that's near a half-century low. Many companies that have reported earnings have beat analysts' expectations, helping propel stocks to fresh highs last week.

"Why exactly are we cutting rates?" said Eddie Perkin, chief equity investment officer at Eaton Vance Management. "It doesn't really make sense to me." Mr. Perkin said that unresolved trade tensions appear to be a bigger headwind for financial markets than the level of interest rates at the moment.

Apple stock jumped about 2.5% after the company reported strong revenue growth on Tuesday. Advanced Micro Devices Inc. fell about 9.8% after it projected weaker-than-expected revenue growth for its current quarter.

Treasury prices rose along with stocks on Wednesday, pushing yields lower, but pared some of their gains after the Fed decision. The yield on the 10-year Treasury note hovered at 2.040% in recent trading, according to Tradeweb, down from 2.063% on Tuesday.

Elsewhere, the Stoxx Europe 600 climbed about 0.2%. European bank stocks rose on Wednesday amid a set of strong earnings reports. Credit Suisse climbed 2.4% and BNP Paribas gained 1.6%. Deutsche Bank's stock rose 2.1%.

Earlier, Asian stocks fell after tweets from President Trump on Tuesday dampened optimism for a breakthrough in U.S.-China trade talks.

"There are issues that make a comprehensive and durable deal quite difficult to achieve," said Arnab Das, global market strategist at Invesco, adding that he doesn't expect a complete breakdown or a Brexit-type risk of a no-deal.

Hong Kong's Hang Seng was down by 1.3% and the Shanghai Composite Index fell by 0.7%.

Shares of Chinese property developers fell after the country's leadership vowed not to use the real-estate market as a tool to try to arrest an economic slowdown. At a meeting Tuesday, the Communist Party's top decision-making body reiterated that housing is "used for living, not for speculation," adding it "will not use real estate as a short-term means of stimulating the economy."

Global oil benchmark Brent crude was up 0.5% at $64.95 a barrel, amid continued tensions in the Middle East and expectations of lower interest rates in the U.S.

Shen Hong contributed to this article.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Lauren Almeida at lauren.almeida@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ADVANCED MICRO DEVICES 2.83% 39.6467 Delayed Quote.108.88%
APPLE INC. 0.10% 265.94 Delayed Quote.68.48%
BNP PARIBAS -0.08% 50.59 Real-time Quote.28.26%
CHINA-SHANGHAI COMP -0.64% 2891.34 End-of-day quote.15.75%
CREDIT SUISSE GROUP AG -0.31% 12.89 Delayed Quote.19.72%
DJ INDUSTRIAL 0.07% 28013.32 Delayed Quote.20.05%
EATON CORPORATION PLC -1.51% 90.2795 Delayed Quote.33.69%
EATON VANCE CORP. -0.08% 48.06 Delayed Quote.36.64%
EURO / BRITISH POUND (EUR/GBP) -0.12% 0.85451 Delayed Quote.-4.76%
HANG SENG 1.22% 26644.6 Real-time Quote.1.84%
INVESCO LTD. -0.26% 17.405 Delayed Quote.4.24%
KIRBY CORPORATION -0.21% 83.04 Delayed Quote.23.29%
LONDON BRENT OIL -1.72% 62.14 Delayed Quote.15.59%
NASDAQ 100 0.04% 8315.746969 Delayed Quote.30.46%
NASDAQ COMP. -0.02% 8538.026853 Delayed Quote.27.79%
S&P 500 0.03% 3120.58 Delayed Quote.24.48%
STOXX EUROPE 600 -0.01% 405.99 Delayed Quote.19.77%
STOXX EUROPE 600 NR 0.00% 875.17 Delayed Quote.23.18%
WTI -1.75% 56.7 Delayed Quote.26.39%
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