The Federal Reserve sent shockwaves through Wall Street with a landmark decision to cut the federal funds rate by 50 basis points, bringing it down to a target range of 4.75% to 5%. This aggressive move, the first of its kind in four years, was widely anticipated and initially spurred a surge in stock prices and a weakening of the U.S. dollar.
However, the market’s euphoria was short-lived. In his press conference following the announcement, Federal Reserve Chair Jerome Powell struck a more cautious tone, hinting at a more measured approach to future rate cuts. This tempered investor enthusiasm, leading to a reversal in market sentiment.
The Fed’s dot plot, which outlines each policymaker’s rate path preference, suggested further easing ahead. The dot plot indicated that the Fed is likely to cut rates by a quarter percentage point at each of the next two decisions. Looking further ahead, it suggests an additional rate reduction of at least another percentage point in 2025.
Powell’s key statements, emphasizing that the 50-basis-point cut should not be seen as the new norm, left investors questioning the future course of monetary policy. His remarks, including “No one should look at today and think this is the new pace,” and “If the economy remains solid and inflation persists, we can dial back policy restraint more slowly,” suggested a more cautious approach to future rate cuts.
The market’s initial exuberance quickly dissipated as Powell’s comments sunk in. The S&P 500, which had initially surged to record highs, closed 0.3% lower. The Nasdaq 100, tracked by the Invesco QQQ Trust QQQ, declined by 0.4%. Small caps, which had outperformed large caps initially, ended the day unchanged, giving back all their post-rate-cut gains.
The U.S. dollar, which many anticipated would plummet in response to the 50-basis-point cut, instead recouped its losses and rallied to weekly highs. The Invesco DB USD Index Bullish Fund ETF UUP closed 0.1% higher.
Gold, which had hit all-time highs as the U.S. dollar weakened, dropped 0.4% to $2,555 per ounce. Silver and oil also saw robust declines, closing 2.1% and 1.2% lower, respectively. Bitcoin BTC/USD fell 1.1% to $59,717.
Economists weighed in on the Fed’s decision and Powell’s remarks. Jeffrey Roach of LPL Financial noted that the Fed is aiming to reach a neutral fed funds rate as quickly as possible. John Lynch of Comerica Wealth Management was surprised by the Fed’s aggressive move, considering the current state of the economy. Bill Adams of Comerica Bank predicted that interest rates will decline significantly over the next six to twelve months, which could be positive for credit-sensitive sectors. Chris Zaccarelli of Independent Advisor Alliance believes that lower interest rates will allow the market to reach all-time highs by year-end and generate more gains for next year.
The Federal Reserve’s rate cut and Powell’s subsequent comments have left investors with a sense of uncertainty. While the 50-basis-point cut initially sparked optimism, the market’s response suggests that investors are now looking for more clarity on the Fed’s future course of action.
