Fed Announces Super-Sized Rate Cut, Signaling the Start of a New Easing Cycle
The Federal Reserve made headlines on Wednesday by announcing a 50-basis point cut in interest rates, marking the first reduction since March 2020. This cut, which brings the Fed’s benchmark rate down to a range of 4.75% to 5.0%, signals the start of a new easing cycle aimed at supporting the economy after more than a year of elevated rates intended to curb inflation.
This decision was not without some internal disagreement. Fed Governor Michelle Bowman advocated for a smaller, 25-basis point reduction, but the larger cut reflects growing concerns among other members of the Federal Open Market Committee (FOMC) about potential economic weakening. The updated “dot plot” also suggests that more rate cuts are on the horizon as the Fed seeks to stabilize economic growth.
At a press conference following the announcement, Fed Chair Jerome Powell downplayed fears of a recession, citing resilient economic growth, cooling inflation, and a strong labor market. Powell stated, “I don’t see anything in the economy right now that suggests that the likelihood of a downturn is elevated.”
Market Reactions
Despite Powell’s reassurances, the stock market responded with mixed results. Futures surged, with S&P 500 futuresgaining 62 points (+1.1%), Nasdaq 100 futures up 323 points (+1.7%), and Dow futures adding 267 points (+0.6%) following the Fed’s announcement. On Wednesday, however, Wall Street had a more subdued response, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all finishing slightly lower after an initial rally during Powell’s press conference. Analysts from Vital Knowledge noted that the rate cut had been widely expected and “largely priced in” by the time of the Fed’s announcement.
In the bond market, the spread between 2-year and 10-year Treasury yields steepened to its highest level since 2022, reflecting long-term growth expectations. The dollar index remained relatively flat, with analysts expecting the dollar to stay soft barring a significant shift in labor market data.
Global Focus: Bank of England and Bank of Japan
The attention now turns to the Bank of England (BoE), which is set to announce its policy decision on Thursday. The BoE is expected to leave its rate unchanged at 5.0% following a cut in August, though policymakers are likely to maintain a cautious stance given ongoing inflationary pressures in services. Meanwhile, the Bank of Japan (BoJ) is expected to hold rates steady at the conclusion of its two-day meeting, though officials may signal a more hawkish stance as inflation rises.
Commodity Market Reactions: Gold and Crude
Gold prices experienced some losses following the Fed’s announcement but were slightly higher in European trading on Thursday. While the prospect of lower rates is supportive for gold as a non-yielding asset, Powell’s comments that the neutral rate will remain higher than pre-pandemic levels dampened some of the recent bullish sentiment around the metal.
In the crude oil market, prices rose in response to the rate cut, which boosted hopes for increased economic activity in the U.S., the world’s largest oil consumer. Brent crude was up 0.9% to $74.34 per barrel, while WTI crude climbed 1.0% to $70.58 per barrel. These gains came after U.S. government data showed a larger-than-expected drop in oil inventories, signaling strong demand despite concerns over global economic weakness.
Stock Upgrades and Downgrades
For those of you actively trading, make sure to stay on top of today’s stock upgrades and downgrades. Yesterday, Zillow was upgraded by analysts with a price target increase to $80, while Ambac Financial saw an upgrade from “Neutral” to “Buy” with a raised price target of $15. Meanwhile, Cleveland-Cliffs experienced a downgrade, with its price target being reduced to $13.50 by Morgan Stanley.
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