During yesterday’s Federal Reserve (Fed) meeting, U.S. interest rates were cut by 50 basis points (bp), ending the ongoing debate about the scale of the rate cuts. The decision caused controversy within the Fed – instead of the standard consensus, Michelle Bowman advocated for a smaller cut. By the end of the year, interest rates may be cut by a further 50-75 basis points, which should positively impact financial markets. After the decision was announced, the S&P 500 index recorded a slight drop, although it had reached a new record high just before. Gold also set a new price record, reaching 2591 dollars per ounce.
There has been speculation over the scale of the Fed’s rate cut for over a week, even though its implementation was certain – particularly after signals from Fed Chairman Jerome Powell during his Jackson Hole speech. It turned out that divisions arose not only among economists and investors, but also within the Fed itself. Eventually, a cut of 50 basis points was decided. While in recent years decisions regarding interest rates have been nearly unanimous, this time Michelle Bowman expressed opposition, supporting a smaller cut of 25 basis points.
The current plans of the Fed are crucial. From the “dot plot” forecast, it appears that the rates could drop by 100 basis points by the end of the year (including the current cut), which is in line with market expectations (100-120 bp). The Fed’s updated economic forecasts indicate an increase in unemployment by the end of the year, and a continued decline in inflation. If these forecasts prove correct, further rate cuts are possible. Jerome Powell emphasized that the Fed makes decisions based on incoming data. And this makes it almost impossible to perfectly time the market. The Fed almost always acts either too early or too late. Believing that the economy is in good shape, the Fed is now striving to keep up, which partly explains why the decision to cut the rates by 50bp was taken.
What does this mean for investors? As rate cuts were delayed (even 7 cuts were predicted for 2024 at the end of last year), solid earnings growth and good performance in many sectors fueled S&P 500’s continuous records. As long as the economy continues to grow and inflation does not return, lower interest rates and growing profits can drive further stock growth in the long term. The market calmly reacted to the Fed’s decision – the S&P 500 index fell 0.29% on Thursday, but this came after seven days of strong gains, culminating in a new record. Gold also reached its highest price in history on Friday – 2591 dollars per ounce, which was also the result of the Fed’s rate cut.
Paweł Majtkowski, eToro Analyst.
Source: https://ceo.com.pl/przelomowa-obnizka-stop-procentowych-w-usa-co-to-oznacza-dla-rynkow-33814
