The Federal Reserve gave investors exactly what they paid for He said They wanted to cut interest rates by 50 basis points on Wednesday — but that still wasn’t enough. After a brief rally following the initial announcement, stocks endured a period of highly volatile trading before all three major U.S. market indexes ended lower on Wednesday.
The Dow Jones industrial average fell 0.25%, while the S&P 500 and the technology-based Nasdaq composite fell 0.29% and 0.31%, respectively.
Markets sold off, as did Fed Chair Jerome Powell told reporters In his post-FOMC meeting press conference, the 50 basis point rate cut was an expression of officials’ “confidence” that current labor market strength can continue with an “appropriate adjustment” of monetary policy.
While no one can know the definitive reason behind stocks’ negative reaction to what should have been a market-juice mega rate cut, Rick Ryder, CIO of BlackRock’s global fixed income and head of BlackRock’s global allocation investment group, floated a theory.
Looking at a summary of the central bank’s economic projections, Ryder noted that Fed officials penciled in two more 25 basis point rate cuts this year and another 100 basis point cut in 2025. That’s a lot, but investors haven’t priced it in before. meeting
“The market has priced in a rate path. Good luck via email.
Basically, while the markets got their juicy 50 basis point rate cut, the Fed officials’ long-term outlook for interest rates was not as enticing as expected.
Thomas Simons, senior economist at investment bank Jefferies, echoed this view in a note to clients on Wednesday. “The long-term rate has been revised continuously, indicating a higher terminal rate. 50 [basis point] “The cut today was a nasty surprise, but we see no signs of more big cuts coming,” he said.
The economy is ‘doing well’ and ‘we’re not lagging behind’
There is another possible reason underlying the negative reaction of stocks to the Fed’s decision on Wednesday. Some see central bankers’ excessive rate cuts as a sign that they recognize they should have started cutting rates months ago.
Powell addressed these concerns in his press conference on Wednesday. “We don’t think we are lagging behind…you can take this as a sign of our commitment not to back down,” he told reporters.
But more than a few experts aren’t buying it. “This is a Fed that believes they are behind the curve,” said Robert Minter, director of ETF investment strategy. abrdnsaid Good luck via email.
Suspicion is not without reason. Even Powell admitted that if Fed officials had seen July’s weak jobs report ahead of that month’s FOMC meeting, they would have cut rates. “If we had July [jobs] Report before the meeting, will we have reduced? We can be good,” he said. “We haven’t made that decision. But you know.
Robert Frick, corporate economist at Navy Federal Credit Union, argued that the Fed may be concerned that labor market data are not as reliable as they thought, after revisions to earlier jobs data showed the U.S. economy employed 818,000 fewer people in the period from March 2023 to March. 2024 than originally announced.
“A half-point cut is an acknowledgment that the Fed is behind the curve, but not a sign of panic,” Frick said. Good luck via email. “The Fed is ‘data driven,’ but skepticism about that data has been proven because it doesn’t paint an accurate picture of the labor market.”
“With inflation all over the place, the central bank should soon improve hiring conditions and encourage investment to create more jobs,” he added.
Powell, however, tried to address concerns about labor market and economic weakness during his press conference.
“The US economy is in good shape,” he said. “It’s growing at a solid pace. Inflation is down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing,” he said.
“I don’t see any possibility of a recession—sorry, a recession—in the economy right now,” he added.
Some experts celebrated Powell’s decision to opt for a 50 basis point rate cut as well. “For the first time since the pandemic, the Fed has taken an aggressive step to stay ahead of the curve by cutting rates to ensure the economy doesn’t slip into recession,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. Good luck via email.
Disagreement among various experts led to the volatile trading seen on Wednesday. Steven Wheating, interim chief investment officer at Citiwealth, cautioned that this could happen ahead of the Fed’s announcement, noting that volatility is common as investors gravitate toward Fed decisions and their myriad potential implications.
There was another market-suppressing comment Powell made on Wednesday.
When it comes to the future outlook for the neutral rate — the level at which monetary policy does not change stimulatively or accommodatively — Powell said he believes “we’re not going to go back” to rates near zero that were common before the pandemic.
“It seems to me that the neutral rate is significantly higher than it was then,” he said.
The sentiment may have fueled a sell-off in stocks, with many investors looking for clues as to where interest rates might land.
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