Last week started off strong as investors were emboldened by the Federal Reserve's impending pivot toward easing monetary policy. Equity prices surged to new highs, corporate bonds were in high demand, and commodity prices moved up. In the corporate bond markets, the new issue market was especially active as issuers looked to lock in funding before portfolio managers head to the beach during the typical seasonal slowdown in August.
As expected, on Wednesday the Federal Reserve cut the federal-funds rate 25 basis points to 2.00%-2.25%, the first cut since the depths of the global financial crisis at the end of 2008. However, in a rare display of contention on the Federal Open Market Committee, two voting members (presidents of the Boston and Kansas City Federal Reserve Banks) dissented from this action. Once the markets digested this information Wednesday afternoon, prices for risk assets began to fall, corporate bond credit spreads widened, and U.S. Treasury prices rose. The markets had been pricing in additional cuts to the fed-funds rate through the end of this year, but two voting members dissenting on this first cut called into doubt the assumption of additional near-term easing, and many traders feared that the Fed might be one-and-done for the foreseeable future. Without the prospect of additional near-term monetary easing, many traders decided to sell and lock in some of the gains they have made thus far this year.