Stocks rallied Wednesday afternoon after the Federal Reserve cut interest rates by 0.5% in its first rate reduction since 2020.
Additionally, the Fed’s latest Summary of Economic Projections (SEP) showed the majority of Fed officials expect the central bank to cut interest rates by 100 basis points in total this year.
Stocks initially rallied following the announcement before paring back gains. The tech-heavy Nasdaq Composite (^IXIC) was down about 0.1%, while the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI) were also off about 0.1%.
The significant policy shift was widely expected, given growing signs that the central bank has managed to cool inflation without severe harm to the economy. But investors were still guessing at whether hopes for a 0.5% cut would be fulfilled or if the historic pattern of 0.25% moves would repeat itself.
Read more: Fed predictions for 2024: What experts say about the possibility of a rate cut
In recent days, traders had stepped up bets on a bigger cut even after Fed officials earlier in September flagged they were more likely to trim the benchmark rate by 25 basis points. As of Wednesday morning, fed funds futures were pricing in a better than 60% chance the Fed would go large, up from just 15% odds a week ago.
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Powell said the labor market is solid. Here’s why.
Powell is confident the Federal Reserve is not behind the curve when it comes to the labor market. He ticked through a few reasons why during his post-decision press conference on Wednesday:
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4.2% unemployment: Powell noted unemployment is “higher than what we were used to seeing,” although anything in the “low fours” is actually “a very low unemployment rate.”
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Labor force participation: The central bank leader called out labor force participation, noting the rate has remained “at high levels.” As of August, the participation rate was around 63%.
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Wage growth: Powell said wage increases are still “a bit above” where the Fed would want them to be over the long-term to be consistent with 2% inflation; however, they are “coming down to sustainable levels.” Wage growth rose to 3.8% year over year in August, up from a 3.6% annual gain in July. On a monthly basis, wages increased 0.4%, also higher than the 0.2% seen the month prior.
Powell added that vacancies for the unemployed are “not as high” as they’ve been while quit rates have “also come back down to normal levels.”
All of these indicators “say this is a solid labor market,” Powell said.
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Labor market is ‘actually in solid condition’
The Federal Reserve’s decision to cut interest rates by 50 basis points rather than 25 basis points raised some concern about how the central bank is viewing the current cooling in the labor market.
Fed Chair Jerome Powell was adamant on Wednesday that the labor market is “actually in solid condition.”
“The US economy is in good shape,” Powell said. “It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”
Powell later noted that the level of employment is still near the Fed’s mandate for “maximum employment.” The August jobs report showed the unemployment rate sat at 4.2% while the US economy added 142,000 nonfarm payroll jobs in the month.
Powell also flagged that recent data on consumption, such as the better-than-expected August retail sales print, “indicates an economy that is still growing at a solid pace.”
He added, “That should also support the labor market over time.”
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Powell: The balance of risks is now even
In his post-decision press conference, Federal Reserve Chair Jerome Powell offered a message of flexibility after the central bank cut interest rates by a jumbo 50 basis points — the first rate cut in more than four years.
Powell said monetary policy will continue to be adjusted to uphold the Federal Reserve’s dual mandate: stabilizing prices while achieving maximum employment. He also emphasized that the Fed will make decisions “meeting by meeting.”
“We are prepared to respond,” he said. “We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”
The central bank leader noted the upside risks to inflation have diminished while the downside risks to employment have increased.
“We know it is time to recalibrate our policy,” he said. “The balance of risks [is] now even.”
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Powell says Fed’s decision had ‘broad support’ despite dissent
The Federal Reserve cut interest rates by half a percentage point on Wednesday.
It was not, however, a unanimous decision. Fed governor Michelle Bowman dissented. She preferred to cut rates by 25 basis points instead of 50. No Fed official has voted against a policy decision in two years, matching one of the longest such streaks in the past half-century.
When asked why the Fed opted for a 50 basis point interest rate cut, Fed Chair Jerome Powell said, “We had a good discussion … [with] broad support for the decision that the committee voted on.”
He added that the Fed’s Summary of Economic Projections (SEP) showed “all 19 of the participants wrote down multiple cuts this year.”
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Instant reaction on the momentous rate cut
I was taught long ago to not put a ton of stock in the moments after a Fed meeting. What happens in markets could easily change the following day as investors digest the news flow.
I think this is an important lesson to keep in mind today as the markets pop on a surprise 50 basis point rate cut from the Fed. By tonight, you could be hearing people voice concerns about why the Fed cut so aggressively — what do they know about the economy that we don’t?
Until then, I think this take from economist Chris Rupkey is level-headed:
“Markets got the 50 bps they wanted and now are soaring to new highs but some investors might be nervous and wondering what the Fed sees and they do not. The last two times the Fed cut interest rates the first time they did it by 50 bps as well, but it was an emergency inter-meeting cut because the outlook had darkened. There were recessions in fact. This time there is little to fear in the economic outlook… we hope.”
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Fed ‘dot plot’ suggests central bank will slash interest rates two more times in 2024
The Federal Reserve signaled Wednesday it would lower interest rates two more times this year after it slashed its benchmark federal funds rate by 50 basis points to a range of 4.75%-5.0% at the conclusion of its meeting on Wednesday.
Fed officials see the fed funds rate coming down to 4.4% in 2024. That suggests the Fed will cut rates by an additional 0.50% later this year. Outside of Wednesday’s jumbo 50 basis point cut, the Fed has moved in 25 basis point increments over the last year or so, indicating the central bank expects to cut interest rates two more times in 2024. The previous June projection had interest rates peaking at 5.1%.
Along with its policy announcement, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future.
In total, 17 officials predicted further easing this year with just two seeing rates holding steady through the remainder of the year. Seven officials estimate just one more cut, while nine officials see two additional cuts. One official predicts three cuts to come by the end of the year.
Next year, the majority of officials see the fed funds rate hitting 3.4%, lower than the 4.1% anticipated in its prior forecast. That suggests four additional rate cuts to come in 2025. Officials see two more cuts from there in 2026, which would bring the fed funds rate down to 2.9%.
The updated projections suggest the Federal Reserve has begun its long-awaited easing cycle as the central bank attempts to maneuver a soft landing of the economy, in which price increases stabilize while employment remains robust.
So far this year, inflation has moderated but remains above the Federal Reserve’s 2% target on an annual basis, pressured by hotter-than-expected readings on monthly “core” prices in recent months.
The job market has also been a particular focus for the Fed after the unemployment rate unexpectedly ticked up to 4.3% in July. It has since come down to 4.2% as FOMC members debate whether or not recent labor market softness indicates the market is gradually cooling or quickly weakening.
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Federal Reserve cuts interest by half a percentage point
The Federal Reserve cut interest rates by half a percentage point on Wednesday and projected two more interest rate cuts of 25 basis points for the year.
Yahoo Finance’s Jennifer Schonberger reports:
The action marks the Fed’s first easing of monetary policy since 2020 and the termination of its most aggressive inflation-fighting campaign since the 1980s.
The decision came in a split vote at the conclusion of the Fed’s two-day policy meeting as officials cut the central bank’s benchmark rate by 50 basis points to a new range of 4.75%-5%.
Rates had previously been held at a 23-year high since last July.
There was some division on the final decision, with Fed governor Michelle Bowman dissenting.
She preferred to cut rates by 25 basis points instead of 50. No Fed official has voted against a policy decision in two years, matching one of the longest such streaks in the past half-century.
Moreover, no Fed governor has dissented on a rate decision since 2005.
The consensus among Fed officials at today’s meeting was that they now see two more 25 basis point cuts this year, followed by four more cuts next year and two more cuts in 2026.
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Stocks up marginally ahead of the Fed decision
About 20 minutes before the Fed’s highly anticipated interest rate decision, stocks are slightly higher.
The tech-heavy Nasdaq Composite (^IXIC), the S&P 500 (^GSPC), and the Dow Jones Industrial Average (^DJI) were all up about 0.1%.
Meanwhile, the 10-year Treasury yield (^TNX) was sitting at 3.68%, up about three basis points on the day.
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Size of Fed rate cut could unravel rally for real estate stocks
Real estate stocks could extend their rally, assuming the Fed makes its first interest rate cut in four years. However, the size of the rate cut matters, according to one portfolio manager.
“The market will respond more favorably to a larger cut, and we could see real estate stocks rally in a bigger way than if there is a 25 bps rate cut,” Todd Kellenberger, Principal Asset Management’s REIT client portfolio manager, told Yahoo Finance in an email.
Ahead of the Fed’s policy decision announcement, investors were placing the probability of a 50-point cut at 59%, according to CME’s FedWatch tool.
The Real Estate Select Sector SPDR Fund (XLRE) — whose top holdings include REITs like Prologis (PLD) and American Tower (AMT) — is up 17% this quarter. This is a surprising turnaround from the start of this year, as the sector suffered from elevated borrowing costs. Mortgage rates have moved lower since then.
Kellenberger remains bullish on the landscape for REITs once the path for the Fed’s plan becomes even clearer.
“We believe the more important thing to watch is the Fed’s commitment to future rate cuts,” Kellenberger added. “A strong commitment to cutting rates in the future will be important to sustain a rally in REIT stocks in the near term. Market sentiment will likely favor interest rate-sensitive areas of the market like REITs.”
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The Fed’s rate cut path will matter more than 25 vs. 50 basis points: Economist
The big debate entering 2 p.m. ET is whether the Fed will opt for a 25 basis point interest rate cut or a 50 basis point interest cut.
But some economists have pointed out that the more important part of today’s news will be what the central bank signals about its plan for interest rate cuts over the next year.
“Whether it’s 50 basis points or 25 basis points, as long as the Fed signals that they expect to make substantial further cuts into 2025, I think that will provide the reassurance that financial markets and the economy more broadly needs that those interest rate sensitive sectors can rebound next year,” Comerica Bank chief economist Bill Adams told Yahoo Finance.
Entering Wednesday’s press conference, markets are pricing in roughly 100 basis points of easing through the end of 2024 and nearly 250, or almost ten 25 basis point cuts, by the end of 2025.
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Fed rate cuts when the S&P 500 is near an all-time high have been good for stocks
The S&P 500 (^GSPC) is trading around 5,630 on Wednesday, within striking distance of its record close from July of 5,667.20 as markets await the first interest rate cut from the Federal Reserve since 2020.
According to research from Carson Group chief market strategist Ryan Detrick, this is typically a good sign for stocks. Going back in history, Detrick’s work shows that during the 20 times the Fed has cut rates with the benchmark index near a record high, the S&P 500 has been higher a year later.
The Fed has cut rates with stocks near all-time highs 20 times.
The S&P 500 was higher a year later 20 times.
S&P 500 at all-time highs now and the Fed is cutting tomorrow. pic.twitter.com/MSHhII1Cu4
— Ryan Detrick, CMT (@RyanDetrick) September 17, 2024
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A smaller Fed cut could bring volatility to the stock market
As we noted earlier this week in the Yahoo Finance Morning Brief, markets have moved dramatically in the past week to price in a 50 basis point interest rate cut.
And now that the market predicts the larger cut, the real surprise for investors could be if the Fed opts for the smaller cut. With a long break between today and the Fed’s next scheduled policy decision on Nov. 7, not slashing rates could raise uncertainty in the market, George Cipolloni, portfolio manager at Penn Mutual Asset Management, told Yahoo Finance.
This would notably leave the Fed on the sidelines to watch two labor reports, which could shake the market if they reveal signs of growing weakness and make the Fed appear behind the curve.
“It’s going to be a very uncertain period,” Cipolloni said. “And I do think we have a gap potentially for volatility here if the market gets disappointed with 25 basis points.”
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Apple stock bounces back, leads Nasdaq higher
The Nasdaq Composite (^IXIC) was the best performer of the major indexes on Wednesday, rising more than 0.2% at around 11 a.m. ET.
A bounce-back in Apple shares helped lead the charge. The stock rose more than 2% early Wednesday morning after falling earlier this week on reports of weak demand for the newly launched iPhone 16.
Apple has nearly erased all of its losses from earlier this week.
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Expect the biggest market moves after Powell
Stocks are quiet on Wednesday morning. But recent history tells us that’s to be expected on a day when the market is waiting for a Fed decision and press conference from Chair Powell.
A chart from Bespoke Investment Group shows most of the trading action on Fed days comes after Powell begins his press conference at around 2:30 p.m. ET.
During the past 10 Powell pressers (shown in red), stocks have rallied before eventually giving back a large portion of their gains and closing below the highs of the day.
A chart from Bespoke Investment Group shows how the S&P 500 has performed on days the Federal Reserve announced a monetary policy decision dating back to 2018. (Bespoke Investment Group) -
Stocks waver at the open
Stocks were little changed at the open on Wednesday as investors patiently await the Federal Reserve’s next monetary policy decision at 2 p.m. ET.
As debate swirls about whether the Fed will cut interest rates by 25 or 50 basis points, the three major indexes appeared to be in wait-and-see mode.
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Housing starts jumped in August amid declining mortgage rates
New residential construction increased in August as mortgage rates continued their decline.
Housing starts rose 9.6% from the previous month to a seasonally adjusted annual pace of 1.356 million units, according to data from the Census Bureau released Wednesday. Single-family housing starts soared 15.8% to a seasonally adjusted annual pace of 992,000.
The data comes as homebuilders feel more confident about the housing market. Mortgage rates are at their lowest level in over a year. Rates have been on a downward trend recently, with investors expecting the Fed to announce an interest rate cut at the conclusion of its policy meeting later Wednesday.
The data showed that building permits for single-family homes rose to a pace of 967,000, a 2.8% increase from July’s revised figure of 941,000. Meanwhile, permits for multifamily homes came in at a rate of 451,000 in August.
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Dimon says the rate cut debate is overrated
JPMorgan Chase (JPM) CEO Jamie Dimon told a conference on Tuesday that any interest rate move by the Fed would “not going to be earth-shattering,” arguing that “it’s a minor thing when the Fed’s raising rates and lowering rates because underneath that there’s a real economy.”
The comments follow Dimon telling CNBC last month that when it comes to the debate about how much the Fed cuts interest rates, “I don’t think it matters as much as other people think. You know, the rate effect itself isn’t that critical.”
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‘The Fed cutting by 50 basis points is a real possibility’
From Yahoo Finance’s Jennifer Schonberger:
“The Federal Reserve is widely expected to cut interest rates for the first time in four years Wednesday and outline the path for future rate cuts.
Investors have been hoping for a larger half-percentage-point cut versus a quarter-point cut. Traders, in recent days, have increased their wager that the central bank will cut by a deeper 50 basis points. Wednesday morning, fed funds futures were pricing in a better than 60% chance the Fed cuts by 50 basis points, up from just 15% odds a week ago.
‘The Fed cutting by 50 basis points is a real possibility,’ said Wilmer Stith, a bond trader for Wilmington Trust, who just last week thought it was more likely the central bank could cut by 25 basis points. He’s on the fence, though, as to whether it actually happens.”
