The Federal Reserve gave investors exactly what they said They desired to cut rates of interest by a whopping 50 basis points on Wednesday – but that was still not enough. After a temporary rise following the initial announcement, stock prices went through a period of high volatility before all three major US market indices closed within the red on Wednesday.
The Dow Jones Industrial Average fell 0.25%, while the S&P 500 and tech-heavy Nasdaq Composite fell 0.29% and 0.31%, respectively.
Markets sold off, although Fed Chairman Jerome Powell told reporters At his press conference after the FOMC meeting, he said the 50 basis point rate cut was intended to display officials’ “confidence” that the present strength of the labor market may be sustained with an “appropriate recalibration” of monetary policy.
While nobody can know the definitive reason for the equity markets’ negative response to the massive rate cut that was purported to boost the market, Rick Rieder, CIO of Global Fixed Income at BlackRock and head of the BlackRock Global Allocation Investment Team, offers a theory.
Looking on the Fed’s summary of economic forecasts, Rieder noted that Fed officials have planned two more rate cuts of 25 basis points each this yr and one other 100 basis point cuts in 2025. While that is rather a lot, it is not what investors had priced in before the meeting.
“The market has priced in a path for interest rates that is more similar to what a looming recession would require … as opposed to a recalibration of rates toward a less restrictive or neutral policy trajectory, which we believe this cycle is likely to represent,” he said. Assets by email.
Although markets received a hefty 50 basis point rate cut within the short term, Fed officials’ longer-term rate of interest outlook was essentially not as attractive as expected.
Thomas Simons, a senior economist at investment bank Jefferies, echoed that view in a note to clients on Wednesday. “The long-term interest rate continues to be revised upward, implying a higher terminal rate. The 50 [basis point] “Today’s rate cut was a moderate surprise, but we see no signs that further major rate cuts are imminent,” he said.
The economy is doing well and we should not lagging behind
There is one other possible reason for the negative response of the stock markets to the Fed’s decision on Wednesday. Some see the Fed’s disproportionate rate cut as an indication that they’ve realized that they need to have began cutting rates of interest months ago.
Powell addressed those concerns in his press conference on Wednesday. “We don’t think we’re behind… You can see this as a sign of our determination not to fall behind,” he told reporters.
But quite a couple of experts simply don’t imagine that. “The Fed believes it is lagging behind,” says Robert Minter, director of ETF investment strategy at abrdntold Assets by email.
The skepticism isn’t unfounded. Even Powell himself admitted that Fed officials would probably have cut rates of interest in the event that they had seen the weak July jobs report before the FOMC meeting that very same month. “If we had seen the July report, [jobs] report before the meeting, would we have cut? We certainly could have done that,” he said. “We did not make that decision. But you know we certainly could have.”
Robert Frick, corporate economist at Navy Federal Credit Union, even argued that the Fed could also be concerned that labor market data isn’t as reliable as previously thought after revisions to earlier labor market data showed that the U.S. economy employed 818,000 fewer people between March 2023 and March 2024 than originally reported.
“The half-point cut is an admission that the Fed is lagging behind, but not a sign of panic,” Frick said. Assets by email. “The Fed has been ‘data-driven,’ but doubts about those data have proven to be justified, as they did not paint an accurate picture of the labor market.”
“With inflation virtually at rock bottom, the Fed must quickly improve hiring conditions and stimulate investment to create more jobs,” he added.
However, during his press conference, Powell again attempted to handle concerns concerning the labor market and economic weakness.
“The U.S. economy is in good shape,” he said. “It’s growing at a solid pace. Inflation is low. The labor market is strong. We want to keep it that way. And that’s exactly what we’re doing.”
“I don’t see anything in the economy right now that suggests the likelihood of a recession – sorry, a downturn – is increased,” he added.
Some experts also welcomed Powell’s decision to chop rates of interest by 50 basis points. “For the first time since the pandemic, this Fed has taken aggressive action to get ahead of the curve by cutting rates to ensure the economy does not slide into recession,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. Assets by email.
Perhaps it was these disagreements between various experts that led to Wednesday’s volatile trading activity. Steven Wieting, interim chief investment officer at Citi Wealth, warned that this might occur even before the Fed’s announcement, noting that volatility is normal as investors process the Fed’s decisions and their myriad potential implications.
There was one other potentially market-dampening comment from Powell on Wednesday.
As for the long run outlook for the neutral rate of interest – the extent at which monetary policy is neither stimulative nor accommodative – Powell said he believes we won’t return to the near-zero rates of interest that were common before the pandemic.
“My impression is that the neutral interest rate is probably significantly higher than it was then,” he said.
With many investors in search of clues about where rates of interest will go, not only within the near future but in addition over the following few years, this comment could have exacerbated the equity sell-off.
