The Suspense Is Over — Evening Brief – 09.18.24

The Federal Open Market Committee (FOMC) announced a half percentage-point interest rate cut on Wednesday to a new range of 4.75% to 5.00% for the federal funds rate, in what essentially shifted to a toss-up between a quarter-point and a half-point cut minutes before the highly anticipated announcement.

“It is a decision that will be met with both elation and criticism,” Michael Underhill, CIO Capital Innovations, told Connect Money. “The larger rate cut should placate participants who think the Fed is behind the curve already in trying to forestall a hard landing.”

Since the last FOMC meeting on July 31, the financial markets have had to contend with growth concerns, Fed Chair Jay Powell’s dovish speech at the Jackson Hole Symposium, and a flurry of dovish comments from FOMC members.

“Conversely, it will elicit criticism from participants who think the larger rate cut wasn’t warranted given broader economic trends that include an inflation rate that is much improved but still above target at 2.5%. The worry will be that the more aggressive rate cut risks igniting inflation again,” warned Underhill.

Meanwhile, the Fed did not modify its GDP prediction for 2025, since it expects unemployment to rise only slightly to 4.4% from 4.2%, and core PCE falling to 2.2% from 2.3%.

“This scenario is unlikely, of course, which means either a more aggressive easing cycle than the Fed has penciled in or a pivot back into tightening well before the end of the current forecast horizon, Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., told Connect Money. “And given the current employment and inflation trajectories, the former remains a better bet than the latter.”

In terms of markets, stocks and US Treasuries have been at odds since the most recent FOMC meeting, with the former continuing the robust rally of the previous 11 months, indicating no recession, while the latter has seen yields fall about 50 basis points, indicating a recession.

“That said, with stock prices at record highs and initial jobless claims — a leading indicator — still well below recession levels, it would seem by way of the larger rate cut to get things started that perhaps the Fed sees more of an imbalance than it is letting on,” added Underhill.

Underhill provided market data on the last two occasions that the Fed cut interest rates by 50 basis points. On Jan 3, 2001, the central bank cut 50 basis points to 6%, and the S&P 500 fell about 39% over the next 448 days, On September 18, 2007, the Fed also cut 50 basis points to 4.75%, and the S&P 500 fell roughly 54% over the next 372 days.