The U.S. Federal Reserve is poised to cut interest rates at its meeting next Wednesday. This would be the first rate cut since March 2020. The anticipated decision comes as inflation has significantly cooled.
Please see below for context ahead of next week's #FederalReserve policy meeting:
Officials' interest rate expectations, including relative to what #markets expect.
Additional details on market pricing.
The Fed's latest macroeconomic projections.
More to follow.#economy pic.twitter.com/JegasOq9EU— Mohamed A. El-Erian (@elerianm) September 11, 2024
The Consumer Price Index (CPI) measure of inflation has fallen to an annualized increase of just 2.5%. This is close to the Fed’s target of 2%. Several factors had contributed to a significant rise in inflation during the COVID-19 pandemic.
Current Market expectations for Fed Rate Cuts…
-Sep 18, 2024: 25 bps cut to 5.00-5.25%
-Nov 7, 2024: 50 bps cut to 4.50-4.75%
-Dec 18, 2024: 25 bps cut to 4.25-4.50%
-Jan 25, 2025: 50 bps cut to 3.75-4.00%
-Mar 19, 2025: 25 bps cut to 3.50-3.75%https://t.co/l5IYmkf6Ih pic.twitter.com/Y2wZRHE4r5
— Charlie Bilello (@charliebilello) September 12, 2024
These included heightened government spending, ultra-low interest rates, a rapid increase in money supply, and product shortages.
Are rate cuts necessarily bullish for stocks? Not if they're associated with an economic downturn and earnings decline. Join me tomorrow at 2pm EST for a live show w/ @ycharts covering rate cuts, recessions, and much more.
Register here, open to all: https://t.co/UtUTgsm1kJ pic.twitter.com/hptHhrt1Sh
— Charlie Bilello (@charliebilello) September 11, 2024
To combat this, the Fed raised the federal funds rate over 18 months to the current range of 5.25% to 5.50%. This aggressive rate hike campaign appears to have been effective in cooling inflation.
Recent economic data indicate that further adjustments may be necessary. The Fed has signaled plans for an interest rate cut at its upcoming two-day meeting, scheduled for September 17-18. This potential rate cut could foreshadow substantial movements in the stock market.
A bigger increase in cyclically-sensitive shelter prices in August will make it harder for Fed officials to shake reservations about starting rate cuts with a 50 bps reduction next week https://t.co/epDri2sS7f
— Nick Timiraos (@NickTimiraos) September 11, 2024
Falling interest rates are typically beneficial for stocks in the long term as they reduce borrowing costs for companies, potentially boosting their earnings.
Fed signals potential rate cut
Furthermore, lower rates make risk-free assets like cash less attractive, encouraging investment in stocks.
However, history shows that the commencement of a rate-cutting cycle can initially coincide with a downturn in the stock market. This was seen during the early 2000s tech bubble burst, the 2008 global financial crisis, and the 2020 pandemic. Economic shocks during these periods were often the primary culprits for market declines, rather than the rate cuts themselves.
Currently, there are no signs of an imminent crisis, but the U.S. economy does show signs of slowing. The unemployment rate has risen to 4.2% from 3.7% earlier this year. If this trend continues, it could dampen consumer spending and raise the likelihood of a recession.
The Federal Reserve, tasked with balancing inflation control and manageable unemployment levels, will need to navigate these challenges carefully. At the recent Jackson Hole Economic Symposium, Fed Chair Jerome Powell emphasized the need for policy adjustments in light of declining inflation risks and growing employment market risks. Next week’s meeting will provide the first opportunity for Powell and the Fed to act on this stance through a rate cut.
While a rate cut might initially be perceived as a negative signal for the stock market, history assures that the S&P 500 has always climbed to new highs given enough time. Investors should prepare for some short-term volatility but can remain optimistic about long-term growth prospects. This move by the Federal Reserve will be closely watched as it could set the tone for the financial markets in the coming months.
