Has Powell done a damage control exercise by front-loading rate cut?

Consider it to be a coincidence. The US Federal Reserve reduced interest rates by 50 basis points on September 18, 2007. Seventeen years later, on September 18, 2024, the world’s largest central bank reduced rates by 0.5% once more.

Most traders and investors anticipated a quarter percentage rate cut, even though a small number of market analysts had foreseen this massive rate cut. JPMorgan Global Research Chair Joyce Chang was among those few who expected the Federal Reserve to announce a 50 basis points rate cut.

Most analysts believe that a 50 basis point reduction in interest rates indicates economic weakness. Does the Fed know the economy that the market does not? Given that the Fed was slow to lower rates, many speculate that they may have front-loaded the cut as a damage control measure.

Summary of Views

The Fed’s 50 bps cut has raised eyebrows among investors and economists alike. Many are questioning whether the central bank is responding too slowly to evolving economic conditions.

Chair Jerome Powell’s decision to cut rates by 50 bps has sparked debate about the Fed’s outlook. Some view it as a sign of confidence in the economy, while others see it as a cautious response to potential challenges.

The Fed’s recent rate cut comes amid mixed economic signals, leaving investors uncertain about future growth. Analysts are closely monitoring upcoming data to gauge the effectiveness of this decision.

Despite the Fed’s rate cut, market volatility remains a concern for investors. The path forward is unclear, prompting questions about how the economy will respond in the coming months.

Analysts are divided on whether this move signals impending economic trouble or a necessary precaution.

Critics argue that this aggressive stance may have been premature, given current economic indicators.

Market Experts Views: Post the US Fed delivered a surprise rate cut of 50bps on September 18

Subho Moulik, CEO, Appreciate

One couldn’t ask for a more accurate reiteration of the proverbial “glass half full- glass half empty” scenario after Fed Chair Jerome Powell’s address. How should one look at the bumper 50 bps rate cut that the Fed frontloaded?

Should one subscribe to Powell’s comment that the largely unanticipated rate cut “reflects growing confidence… that strength in labour markets can be maintained” or is this a veiled indication that the hiking of interest rates to a two-decade high has dearly cost the labour market, evidenced best from the weak August jobs report.

Market Impact: The three major indices ended the day in the red, signalling that even with a 50-bps cut, the Fed is behind the curve and will need to unload bigger rate cuts before the damage to the labour market can be contained. While investors would be hankering for bigger cuts, the tone set by Chair Powell, especially his comment that 50 bps won’t be the new pace of cuts will be a dampener injecting more volatility and panic in the markets. The action now shifts to the labour market, and more concrete data on the September jobs report (out on October 4) will be another key trigger for the markets.

John Lynch, Chief Investment Officer for Comerica Wealth Management

The Fed was more aggressive than I expected since 50 basis point cuts are historically associated with crises. I don’t consider 2% GDP, 4.2% unemployment rate, and 15% profit growth forecasts for 2025 as a crisis. As a result, I’m still skeptical of the extent of expected rate cuts next year.

The spread between 2s and the Fed funds rate is the widest in 40+ years, which essentially forced the Fed’s hand. They’re more concerned about employment, after spending the last few years on inflation.

Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance

The Fed imposed a significant 50 bps rate cut during the rate-cutting cycle, demonstrating its commitment to supporting maximum employment in the labor market.

Inflation is significantly lower than in 2022, but a stock market rally and a growing economy with lower rates could potentially trigger inflation before the bull market ends.

Market Impact: The market may experience volatility due to election timing, but lowering interest rates and implementing additional cuts by the end of this year should help it reach all-time highs.

Michael Brown Senior Research Strategist at Pepperstone

There is little at face value to suggest the need for such a sizeable rate cut. Instead, the move to deliver such a cut was seemingly driven by the 0.4pp upward revision to this year’s unemployment forecast, and 0.2pp downward revision to the core PCE projection.

Raghvendra Nath, MD, Ladderup Wealth Management

A 50-bps cut is a positive surprise. It indicates the confidence of the Federal Reserve in its policy outcomes over the last two years. We feel that the Fed is not going to rush into reducing rates aggressively but act strictly based on data, as has been seen over the past two years.

Market Impact: The market seems to be building another 50-bps rate cut in 2024 and a few further cuts in 2025.

Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Bajaj Finserv AMC

The Dot Plot is indicating an additional 50 bps by year-end. The focus is back to the maximum employment mandate of the Federal Reserve.

This looks like an apt decision from a risk-management perspective, the economic cost of this pre-emptive 50 bps cut is lower than the cost of waiting and then being forced into a bigger cut later if incoming data suggest further deterioration in the labor market. Also, note it is usually too late to cut rates by the time the evidence of labor-market deterioration is clear.

Amit Goel, Co-Founder & Chief Global Strategist, Pace 360

We see the FED move as a dovish 50 bps cut as even the dot plot has come down. The Bond markets are a little skeptical of FED dovishness and because of that the long-term yields have gone up since the FED decision. We see a US recession happening by the middle of CY 2025 despite the FED cuts.

Market Impact: We believe that global equities are already quite overextended and hence do not have much upside left in them. Bonds and precious metals might trade sideways for some time before starting the next up move. We see dollar index rebounding which usually does post the first FED cut. This could create some headwinds for EM equities in the near term.

Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance Company

Interestingly, this decision saw the first dissent from a Fed governor Michelle Bowman since 2005, advocating for a smaller cut. The Fed is growing more confident that inflation is aligning with its 2% target, while remaining committed to closely monitoring economic data to guide further adjustments. Projections now indicate a cumulative 100 basis point cut in 2025 and an additional 50 basis points in 2026.

Jeffrey Roach, Chief Economist for LPL Financial

We learned from today’s Summary of Economic Projections (SEP) that the Fed is interested in getting to a neutral fed funds rate as quickly as possible. Given structural shifts in the global economy, the Fed is willing for the longer-run fed funds rate to approach 2.9%. Looking ahead, the Fed has plenty of room to further normalize rates as inflation decelerates.