The Federal Reserve’s recent meeting has intensified scrutiny on whether the central bank has commenced its rate-cutting cycle in time to prevent a significant economic slowdown. On Wednesday, the Fed implemented a 50 basis point rate cut—the first reduction in over four years—positioning it as a strategic move to support a resilient economy rather than an emergency response to labor market weaknesses. Prior to the meeting, speculation on the size of the cut was evenly divided.
The effectiveness of Chair Jerome Powell’s outlook will likely influence the trajectory of both stocks and bonds for the remainder of 2024. This year, the prospect of a “soft landing”—where the Fed manages to curb inflation without precipitating a recession—has buoyed stock and bond markets. However, concerns that the Fed may have been tardy in its actions to bolster growth have emerged as labor market indicators show signs of softness.
Eric Beyrich, co-CIO of Sound Income Strategies, observed, “The market may need time to digest what was to many a surprising decision. There will be speculation about what the Fed’s substantial cut might reveal about potential economic weaknesses.”
The market response to the Fed’s decision was relatively muted, with stocks, Treasuries, and the dollar retracing initial gains. The S&P 500, which had risen up to 1% post-decision, ended the day down 0.3%, although it remains nearly 18% higher for the year and close to a record high.
In his remarks following the announcement, Powell characterized the rate cut as a “recalibration” in light of the sharp decline in inflation since last year. He emphasized the Fed’s intention to preempt any potential deterioration in the labor market. Despite this, some investors remained skeptical.
Josh Emanuel, chief investment officer at Wilshire, remarked, “The 50 basis point cut suggests concern that the Fed might be behind the curve, despite Powell’s optimistic tone.” Emanuel had already positioned heavily in bonds, favoring investment-grade credit over high-yield bonds in anticipation of economic downturns.
Conversely, many investors viewed the rate cut as a positive development, potentially supportive of the market. Jeff Schulze, head of economic and market strategy at ClearBridge Investments, commented, “This significantly increases the chances of the Fed achieving a soft landing, which is likely to be bullish for risk assets.”
Historically, the S&P 500 has performed well following rate cuts—averaging a 14% gain in the six months post-cut during non-recessionary periods, according to Evercore ISI data since 1970. In contrast, the index has seen a 4% decline in similar periods during recessions.
Rick Rieder, chief investment officer for global fixed income at BlackRock, suggested that recent labor market reports may have led to an overreaction. He pointed out that other indicators, such as GDP growth estimates, still reflect a resilient economy. “Markets may have overreacted to softer data. Chair Powell’s assessment of a solid economy holds,” Rieder said.
Fed officials have adjusted their rate projections from their June estimates, anticipating deeper cuts while maintaining forecasts above market expectations. The Fed’s current rate range is 4.75% to 5%, with expectations to lower it to 3.4% by the end of next year, compared to the market’s projected 2.9%. The Fed’s revised endpoint for rate cuts, slightly upgraded to 2.9% from 2.8%, may have influenced the Treasury markets, leading to a selloff in longer-term Treasuries. The benchmark 10-year Treasury yield, currently around 3.73%, had recently reached its lowest level since mid-2023.
John Madziyire, head of U.S. Treasuries and TIPS at Vanguard, suggested that the market’s reaction to the pace of cuts was appropriate. He anticipated higher long-term yields.
Looking further ahead, some investors are considering the potential impact of the U.S. presidential election on the Fed’s rate path. Andrzej Skiba, head of U.S. fixed income at RBC Global Asset Management, warned, “Trade wars under a potential Trump presidency could be inflationary, limiting the Fed’s ability to cut rates further.”
