Introduction to the Fed’s Rate Cut
The Fed finally gave the stock market what it had been waiting for all year – a 25-basis-point rate cut. However, the market’s reaction was not as expected, as the cut was mostly priced in before the central bank made its big announcement. US stocks jumped initially but drifted lower as Chairman Jerome Powell began his press conference.
Market Reaction
The 10-year US Treasury yield, which reflects long-term interest rates in the economy, initially ticked lower by two basis points but then jumped 4 basis points higher to trade around 4.07%. Investors have been waiting for the Fed to resume its rate-cutting cycle all year and had been pricing in a cut in September with near certainty for about a month. As a result, the market’s reaction was somewhat muted, with some analysts describing it as a "buy the rumor, sell the news" event.
Analysts’ Insights
Some top Wall Street analysts had also recently warned that a rate cut could ultimately be a tepid event for markets. JPMorgan’s head of global market intelligence, Andrew Tyler, wrote that the September 17 Fed meeting could turn into a "Sell the News" event as investors pull back to consider macro data, the Fed’s reaction function, and potentially stretched positioning. Art Hogan, chief market strategist at B. Riley Wealth, told Business Insider that the market’s reaction was not unusual, given that the cut was largely expected.
The Fed’s Decision
Fed Chair Powell pointed to recent weakness in the labor market as a factor in the decision to cut rates. Job growth in the US has likely fallen below the breakeven rate, the pace it would need to keep unemployment steady, he said. The Fed’s latest Summary of Economic Projections also showed that central bankers penciled in two more rate cuts through the end of the year, reflecting a steeper pace of easing than what was forecast at its June policy meeting.
Market Expectations
According to the CME FedWatch tool, investors are expecting two more rate cuts from the Fed by the end of the year. On Wednesday, the odds that the Fed will lower rates another 50 basis points in 2025 shot up to 92%, up from a 69.2% probability on Tuesday. Seema Shah, the chief global strategist at Principal Asset Management, said that the dot plot showing two more cuts this year reinforces the notion that today is the first in a sequence of cuts and should give markets a positive boost.
Conclusion
In conclusion, the Fed’s rate cut was largely expected by the market, and as a result, the reaction was somewhat muted. However, the Fed’s decision to cut rates and the expected future cuts could still have a positive impact on the market. Investors will be closely watching the market’s reaction in the coming days and weeks to see how the rate cut affects the economy and the stock market.
