On Wednesday (Sep 18), the Federal Reserve made a significant move, cutting interest rates for the first time in over four years. The benchmark rate was slashed by 0.5%, bringing it down to a range of 4.75% to 5%.
In the article, we will discuss how the stock market reacts, the possible outcome for interest rate direction and the stock market in the future.
How Did the Market React?
Some say this rate cut is larger than expected because many analysts predicted a modest 0.25% reduction. But if you pay attention, the futures market had already priced in a 0.5% cut, which explains the rally of bonds and REITs recently.
The market’s muted response wasn’t surprising to me, given the priced-in cut. My concern was whether there would be profit-taking, especially since the S&P 500 has risen nearly 18% this year. A pullback after hitting record highs isn’t unexpected.
Notably, while larger indices remained flat, small and mid-cap stocks remained strong. This could mean continued confidence in the U.S. economy and the Fed’s ability to manage it.
What About Future Rate Cuts?
The Fed emphasized that this cut wasn’t in response to labor market weakness. Jerome Powell stressed that the labor market is strong, and this action aimed to maintain that strength.
I believe the Fed is catching up after missing opportunities earlier this year. Historically, regulators have acted late, as seen in the previous rate hike cycle.
Although Powell hinted at less aggressive future cuts, the Fed’s dot plot shows 10 out of 19 officials favor another 0.5% cut or more by year-end.
However, the market is mostly expecting a 0.25% cut in November, with a divided view of 0.75% points or more in total rate cuts by year-end.
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