The Federal Reserve has finally cut rates after a year of waiting. But markets were non-plussed.
- The Federal Reserve cut rates by 50bps and signalled that more rate cuts may be on the way.
- Equity markets were nervous, with a larger cut possibly suggesting concerns over the US economy.
- Bond markets were already anticipating cuts – and many bond managers believe they were too optimistic already.
It’s been a long wait, but the US interest rate cut is finally here. In the end, the Federal Reserve was aggressive, cutting rates by 50bps and signalling that more rate cuts may be on the way. It may show that the central is more nervous about the economy than initially thought – all but one committee member voted for the 50bps cut - but it also sent a clear signal that the inflationary threat has passed.
The Federal Reserve showed no qualms about delivering a chunky boost to the US economy ahead of the election. In reality, it will probably come too late to swing the election either way, but it may give the incumbent a less difficult (though not easy) fiscal legacy. Debt payments amounted to more than a third of tax receipts in the second quarter. While rate cuts won't exactly provide wiggle room, they will make servicing the debt a little easier.
FOMC members expect that this will be the first of a series of cuts, with rates to fall another 50bps by the end of this year, and 100bps in 2025 according to the median forecast. It was notable that short and medium dated treasury markets barely moved in response to the announcement. The US 10 year remained unchanged at 3.68% and there was a small drop in the 2 year. Bond markets were already anticipating cuts – and many bond managers believe they were too optimistic already.
There are more nerves on longer-dated debt, with concerns that the market might ‘rebel’ and push up yields. Hetal Mehta, head of economic research at St. James’s Place, said: “The aggressive rate cuts markets are pricing – over 200bps in less than a year – seem unwarranted to us. Something that risks getting lost in the 50bps excitement is that the longer run rate has been nudged up once again.” This will be an area to watch, particularly as the new president shows his or her hand more clearly.
Equity markets were also unimpressed. After an early bounce, the S&P 500 ended the session marginally lower. Concerns that a larger rate cut may spook the market over the growth rate for the US economy may have been well-founded. However, Fed Chair Jay Powell was giving nothing away: “The US economy is in a good place and our decision today is designed to keep it there.”
