S&P 500 and Nasdaq 100 Reverse Gains as Powell Explains 50bps Cut
S&P 500 and Nasdaq 100 Reverse Gains as Powell Explains 50bps Cut
The Fed chair warned the rate cut cycle is not on a predetermined path and declared the FOMC remains data-dependent
- The Federal Reserve has cut rates for the first time in four years, lowering its main rate by 50bps to 4.75%-5%. Ahead of the meeting, Fed funds futures, the three-month secured overnight financing rate (SOFR) and overnight index swaps were discounting a 50%-55% chance of a 50bps cut.
- Fed Chair Jerome Powell warned the rate cut cycle is not on a predetermined path, saying the FOMC remains data-dependent as it seeks to maintain the strength in the U.S. economy.
- The Fed’s dot plot suggested two more 25bps rate cuts are penciled in by the end of the year at FOMC meetings in November and December.
Market Update: S&P 500 up +0.28% month-to-date
The Federal Reserve’s September interest rate decision has delivered on the volatility promised ahead of time: the decision to start their rate cut cycle with a 50-bps move left nearly half of market participants offsides. Ahead of the meeting, various market measures of cut odds (Fed funds, Three-Month SOFR, and Overnight Index Swaps) were pricing in a 50-55% chance of a 50bps rate cut.
Initially, the somewhat surprising 50bps rate cut pushed U.S. equity markets to fresh highs (with the S&P 500 (/ESZ4) reaching a fresh monthly and two-month high) and sent risk- and growth-sensitive assets soaring: precious metals, energy and non-USD FX partook in the moves. The September Federal Open Market Committee (FOMC) meeting likewise brought new forecasts for inflation, growth,and the glide path of interest rates—all of which pointed to a Federal Reserve that saw a soft landing.
But Fed Chair Jerome Powell’s press conference brought a different perspective. No doubt, Powell was confident, saying that low inflation and price stability have been restored. What was also made clear is that policy is not on a preset course. The Fed head noted people should not assume that “this is not the new pace” of rate cuts, indicating the Fed is still proceeding on a meeting-by-meeting basis to determine the frequency and magnitude of rate cuts. Nevertheless, the new dot plot foresees two more 25-bps rate cut this year, and there are two meetings left in 2024. The September FOMC meeting wasn’t a victory lap per se, but it was pretty close, as it marks the end of the Fed’s fight against the inflation resulting from the coronavirus pandemic.
/ZQ Fed Funds Futures Forward Curve (September 2024 to July 2026)
Rates markets haven’t needed to adjust their pricing on the path of rate cuts in the wake of the September FOMC meeting. By and large, the FOMC endorsed the market’s prescribed path: rates markets were toying with a 50bps cut in either September or November, but there would be 100-bps worth of cuts by December; indeed, that’s the path the Fed has set out. If the destination matters more than the journey, the destination hasn’t changed: For traders looking for more from the Federal Reserve today, that may prove disappointing in the short-term.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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