The bulls are back and investors are pushing the market higher.
Last week, I wrote about why a 50 basis point rate cut could be a mistake, as experts told me a bold move by the Fed could be a dire sign for the economy and trigger a wave of selling in the markets.
But a week later, Wall Street seemed to agree to the deeper rate cut as stock prices rose to record highs.
And traders are betting the Fed will maintain its aggressive pace of easing. While the central bank has signaled further cuts of 50 basis points for its two remaining meetings in 2024, traders are pricing in an additional 75 basis points, according to CME Group’s FedWatch tool.
Experts say it is falling inflation, not the rising risk of recession, that will give the Fed the green light for another sharp rate cut. Prices fell to a three-year low in August.
“If inflation continues to decline, interest rates should be lowered accordingly,” said Kathy Bostjancic, chief economist at Nationwide Mutual.
“The Fed should go 50 basis points lower at the next meeting,” Bostjancic added. “They are far from neutral, so a 50 basis point cut is not necessarily a sign that the economy is falling apart. It is an admission that policy is simply too restrictive.”
The Federal Reserve is expected to release its next interest rate decision on November 7 and will have another opportunity to cut rates at its December meeting.
Read more: The Fed’s rate cut: What it means for bank accounts, CDs, loans and credit cards
If last week is any indication, an aggressive rate cut could be a catalyst for the market. Powell’s emphasis that the Fed’s move should be seen as “a sign of our determination not to backtrack” was enough to boost investor confidence. The S&P 500 (^GSPC) hit its 39th record of the year, while the Dow Jones Industrial Average (^DJI) rose above 42,000 points.
“The Fed was able to cut rates 50 basis points not because it had to, but because it was able to, and I think that’s a very, very critical difference,” said Matt Orton, chief market strategist at Raymond James, in Yahoo Finance’s Morning Brief.
“It supports more investment, it supports more (capital spending), and that’s what contributes to a large part of economic resilience.”
Emily Roland of John Hancock told me that growing optimism about a soft landing was leading to “too much optimism in the markets.”
“Risky assets are celebrating the idea that the Fed can prevent a hard landing and do so proactively before we see further weakness here in the labor market,” Roland said.
Brian Belski, chief investment strategist at BMO Capital Markets, raised his year-end price target for the S&P 500 to a high of 6,100, noting that historical performance patterns “suggest that the market is likely headed for a stronger-than-normal fourth quarter, especially since the Fed has moved into easing mode.”
Two key jobs reports will help the Fed determine the size of its next rate cut. In a note to clients on Friday, Michael Pearce of Oxford Economics warned that a further weakening in the jobs market could prompt the Fed to cut 50 basis points sooner rather than later.
“Given the Fed’s tendency toward monetary easing, negative surprises in labor market data could prompt it to cut rates by another 50 basis points in November,” Pearce wrote.
Sarah Smith is a moderator at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations or other topics? Email [email protected].
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In the following episode “Opening Bid,” Robin Vince, CEO of BNY Mellon (BK), explains his interest rate forecast and what it could mean for your portfolio.
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