Fed Cut Rates Again

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From one side, we’re seeing a loosening of monetary policy, but on the other, there’s plenty of uncertainty about what comes next. And if there’s one thing markets hate, it’s uncertainty.

INTEREST RATE CUT

So, the day before yesterday, the Federal Reserve announced its second consecutive cut to the key interest rate, lowering it by 25 basis points (0.25%), bringing the range down to 3.75%–4.00%.
This move was largely expected, since before the announcement, the probability of a cut was almost 98%.

And not only that — at the same time, the Fed also announced the end of quantitative tightening as of December 1st, meaning it will stop reducing its balance sheet.
We’re talking about a decision that marks the end of an entire era of restrictive policy.

Practically, this means that after a long period of tight monetary conditions, the Fed is now easing.
It’s trying to protect the labor market, seeing that hiring is slowing and unemployment, even slightly, is rising.
And that’s not all — the lack of data due to the government shutdown has left the Fed “flying blind,” without its traditional tools for monitoring the economy.

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POWELL’S STATEMENT

But if you think the Fed will keep cutting rates without hesitation… Jerome Powell came to bring us back to earth.
And rightly so.

In his speech following the announcement, he made it clear that it’s by no means certain we’ll see another cut at the December meeting, saying specifically:

“A further reduction at the December meeting is not a given. Quite the opposite.”

The reason?

There’s major disagreement within the committee itself.
Stephen Miran wanted a 50 bps cut, while Jeffrey Schmid wanted no cut at all.
In other words, we’re openly seeing a split of opinions within the Fed, something rarely this visible.

And because of the U.S. shutdown, the Fed doesn’t have enough economic data to really know what’s happening in the economy.
The latest figures on employment, retail sales, and industrial production haven’t been published.

So what is the Fed doing?

It’s taking a data-dependent approach — waiting for the next set of data.
If it sees the labor market weakening further or inflation continuing to fall, it may cut again.
If not, it might pause — maybe even wait one or two meetings to see where things are heading.

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INVESTMENT OUTLOOK

And how did the markets react to all this?

Mixed.
Perhaps because they expected a more dovish stance from the Fed.
Or maybe because they didn’t like Powell’s ambiguity.

Historically though, when the Fed cuts rates while the S&P 500 is near record highs, the market usually keeps rising.
It’s happened 21 times in the past — and all 21 times, the index was higher one year later.

That’s a huge signal for how we might view the future.

On the other hand, we shouldn’t forget that monetary easing can also bring inflation back — and that’s where caution is needed.

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Posted Using INLEO