Fed Cuts Rates by 50bps, Markets React as Powell Strikes Cautious Tone
Federal Reserve Chair Jerome Powell's remarks, following the Fed's decision to cut interest rates by 50 basis points (bps), brought significant reactions across financial markets. While Powell emphasized that the U.S. economy is in a solid position and that the rate cut was meant to sustain that strength, the decision raised questions, especially given that it comes so close to the upcoming presidential election.
At the press conference, Powell confidently stated, "The U.S. economy is in a good place, and our decision today is designed to keep it there." This sentiment seemed to justify an aggressive 50bps rate cut, even as both stock prices and home values remain at all-time highs. The rate cut, which marks a crisis-level move, was announced just two months before the election, prompting questions about timing.
When pressed on whether the Fed's actions were influenced by the upcoming election, Powell firmly dismissed such notions, stating, "We just don't do that." His assertion aimed to maintain the Fed's stance of independence from political influences.
However, the decision found support among some political figures, with Democratic vice-presidential candidate Kamala Harris welcoming the move, stating, "The Fed's rate decision is welcome news for Americans." Similarly, Democratic Congresswoman Maxine Waters expressed her approval, emphasizing that the Fed had shown its independence by following economic data rather than succumbing to political pressure. "I am pleased that the Fed has not only remained independent but shown the importance of remaining independent as it followed the data and not politics," Waters said in a statement.
On the other side of the aisle, Republican Senator Kevin Cramer of North Dakota criticized the Fed's timing, arguing on social media that the move gave the appearance of political influence. "The Federal Reserve claims political independence. They could have waited to move rates until after the election to confirm it. 25 basis points would've received minor grumblings, but the claim rings hollow with 50 basis points," Cramer wrote, reflecting concerns from some in the Republican camp that the central bank's actions might be politically motivated.
In response to the rate cut, financial markets initially reacted with enthusiasm, but that quickly reversed during Powell's press conference as he hinted that the Fed was not eager to commit to a specific path for future cuts. "The committee is not in a rush," Powell said, adding that the Fed would adjust its policy at whatever pace it deemed necessary. This more cautious tone dampened the optimism in equity markets, with stocks plunging after Powell clarified that the 50bps cut should not be seen as a signal of a new, rapid rate-cutting cycle.
"The market's initial euphoria was short-lived," noted one analyst, as Powell's more hawkish remarks spooked traders. He further diminished expectations by saying, "No one should look at the 50bps cut and say this is a new pace." These words cast doubt on the potential for further aggressive cuts, cooling investor enthusiasm.
The Fed's so-called "dots," or projections for future rate cuts, also reflected a downward shift in expectations. In June, only 4 members of the Federal Open Market Committee (FOMC) anticipated no cuts in 2024, while 7 members expected one cut, and 8 predicted two. By September, expectations had become much more dovish: only 2 FOMC members projected two rate cuts by the end of 2024, 7 anticipated three cuts, and 8 expected four cuts. One lone member, possibly identified as Chicago Fed President Austan Goolsbee, forecasted an aggressive five rate cuts in 2024, marking a sharp shift in sentiment toward looser monetary policy.
This rapid change in the outlook underscores how quickly the central bank's assessment of the economy can shift, driven in part by data that some argue may not fully reflect the real situation. As one observer wryly noted, "So much can change in three months when the government is fooling most of the people with fake data all the time."
Fed rate expectations for 2024 took a sharp dive, with projections for 2025 also turning increasingly dovish, reflecting the belief that the central bank would continue to ease monetary policy in the face of ongoing economic uncertainties. Powell, however, tempered expectations, noting that a return to the era of negative yields on sovereign bonds was unlikely. "We're probably not going back to the era when trillions of dollars worth of sovereign bonds were trading negatively," Powell said, adding that the neutral rate — the rate at which monetary policy is neither restrictive nor stimulative — was likely much higher than previously thought, though he admitted that the exact level remains uncertain.
The initial market response to the Fed's statement was dramatic. Stocks, particularly small-cap equities, surged higher, with small caps rising nearly 2.5% following the FOMC announcement. The S&P 500 briefly touched a new record high before reversing course as Powell spoke. The downturn in stocks reflected a broader sense of caution as Powell's remarks took on a more hawkish tone.
Meanwhile, currency markets also saw significant volatility. The U.S. dollar, as measured by the Dollar Index, initially dropped sharply in response to the Fed's announcement but recovered as Powell clarified the Fed's cautious stance on further rate cuts. The Japanese yen similarly spiked on the FOMC statement, only to tumble back down as Powell's comments became more hawkish.
Gold, which had surged to a record high of $2,600, also retraced much of its gains after Powell's remarks, underscoring the broader risk-off sentiment that took hold as the press conference unfolded. Despite the volatility, gold's strong performance highlighted investor concerns about the long-term stability of the global economy and the impact of the Fed's policies on inflation and currency values.
Bond markets, which had previously diverged from equity markets in terms of expectations, also saw considerable movement. Treasury yields fell sharply on the FOMC statement, reflecting expectations of further rate cuts, but as Powell spoke, yields rose once again, with the 2-year yield holding steady while longer-term yields increased by 7bps. The yield curve, which briefly inverted, later steepened, signaling growing uncertainty about the Fed's future actions and the broader trajectory of the U.S. economy.
Cryptocurrency markets also reacted to the Fed's decision, with Bitcoin initially rising above $61,000 before falling back to unchanged levels for the day. The rapid shifts in digital asset prices reflected the broader volatility seen across asset classes in response to Powell's comments.
Finally, oil prices declined throughout the day, driven by a combination of factors including government data showing a significant inventory draw at Cushing, Oklahoma, and the broader market reaction to Powell's comments. The whipsawing of crude prices added another layer of complexity to an already turbulent day in financial markets.
As the dust settled, questions remained about Powell's legacy and whether he would be remembered in the same light as former Fed Chair Arthur Burns, who presided over a period of high inflation and economic instability. Powell's cautious tone and the Fed's shifting outlook suggest that the path forward for U.S. monetary policy remains fraught with uncertainty, even as the central bank grapples with a complex and evolving economic landscape.