The bulls are back and investors are chasing the market rally.
Last week I wrote about why a 50 basis point rate cut could be a mistake. Experts said the Fed’s bold actions signaled economic doom and gloom and risked causing a market decline.
But a week later, stocks soared to record highs and Wall Street seemed to agree with the latest rate cut.
And traders expect the Fed to continue its aggressive pace of easing. The central bank has signaled another 50 basis points of rate cuts in its two remaining meetings in 2024, but traders are pricing in an additional 75 basis points, according to CME Group’s FedWatch tool.
Experts tell me that it is suppressing inflation, not rising recession risks, that gives the Fed the green light to cut rates further and further. In August, prices fell to a three-year low.
“If (inflation) continues to ease, interest rates should come down accordingly,” said Kathy Bostjancic, chief economist at Nationwide Mutual.
“The Fed should cut rates by 50 basis points (bp) by the next[meeting],” Vostjancic said, adding, “A 50 basis point rate cut is not necessarily a sign of economic collapse, as it is far from neutral. ” he added. It is a recognition that the policy is too restrictive. ”
The Fed is scheduled to announce its next interest rate decision on November 7th, with another chance to cut rates at its December meeting.
Read more: Fed rate cuts: What they mean for bank accounts, CDs, loans, and credit cards
If the past week is any indication, an aggressive rate cut could be a catalyst for the market. Powell’s insistence that the Fed’s moves should be seen as “a sign of our determination not to be left behind” was enough to boost investor confidence. The S&P 500 (^GSPC) hit its 39th all-time high this year, and the Dow Jones Industrial Average (^DJI) soared above 42,000.
“The Fed was able to cut interest rates by 50 basis points not because they had to, but because they could,” Matt Orton, chief market strategist at Raymond James, said on Yahoo Finance’s Morning Brief. I think that’s a really, really important difference.”
“It supports more investment, it supports more (capex), and that’s what’s behind a lot of the economic resilience.”
John Hancock’s Emily Rowland said there was growing optimism for a soft landing, with “huge optimism across the market”.
“Risk assets very much welcome the idea that the Fed can avoid a hard landing and act proactively before we see further weakness in the labor market,” Rowland said.
Brian Belsky, chief investment strategist at BMO Capital Markets, said historical performance patterns “suggest that a stronger-than-normal fourth quarter is likely in store for the market, especially with the Fed in easing mode.” ”
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Two key jobs data will help the Fed determine the size of its next rate cut. Michael Pearce of Oxford Economics warned in a note to clients on Friday that further softening in the labor market could prompt the Fed to cut rates by 50 basis points sooner rather than later.
“Given the shift to an easing bias by Federal Reserve officials, any downside in labor market data could lead to another 50 basis point rate cut in November,” Pearce said. Ta.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Have a tip about a deal, merger, activist situation, or more? Email seanasmith@yahooinc.com.
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