The bulls are back and investors are pushing the market higher.
Last week I wrote about why a 50 basis point interest rate cut could be a mistake, as experts told me that a bold move by the Federal Reserve could signal pessimism for the economy and risk triggering a market sell-off.
A week later, however, Wall Street appears to be on board with a deeper rate cut as stocks surged to record highs.
And traders are betting the Fed will maintain its aggressive pace of easing. While the central bank announced another 50 basis points of cuts at its two remaining meetings in 2024, traders are pricing in an additional 75 basis points, according to CME Group’s FedWatch tool.
Experts tell me it is cooling inflation, not rising recession risk, that will give the Fed the green light for another big cut. Prices fell to a three-year low in August.
“Yeah [inflation] “If interest rates continue to decline, interest rates should be reduced accordingly,” explained Nationwide Mutual chief economist Kathy Bostjancic.
“The Federal Reserve should raise 50 basis points for the next [meeting]”They are far from neutral, so cutting 50 basis points is not necessarily a sign that the economy is falling apart. It is an acknowledgement that policy is simply too restrictive.”
The Federal Reserve will release its next interest rate decision on November 7, and will have another chance to cut rates at its December meeting.
If this week is any guide, an aggressive cut could be a catalyst for the market. Powell’s emphasis that the Fed’s move should be seen as “a signal of our commitment not to fall behind” was enough to boost investor confidence. The S&P 500 (^GSPC) hit its 39th all-time high of the year, while the Dow Jones Industrial Average (^DJI) topped 42,000.
“The Fed was able to cut 50 basis points not because it had to, but because it could, and I think that’s a really key distinction,” Raymond James chief market strategist Matt Orton said on Yahoo Finance’s “Morning Brief.”
“It supports increased investment, it supports increased capital spending, and that’s what’s been behind a lot of the economic resilience.”
John Hancock’s Emily Roland told me that growing optimism about a soft landing is creating “a lot of optimism in the markets.”
“Risky assets are really celebrating this idea that the Fed can avoid a hard landing and do so proactively before we see any further weakness here in the labor market,” Roland said.
Brian Belski, chief investment strategist at BMO Capital Markets, raised his year-end S&P 500 price target to a high of $6,100, noting that historical performance patterns “suggest the market is likely in for a stronger-than-normal fourth quarter, especially as the Fed has shifted into easing mode.”
Two key jobs reports will help the Fed decide the size of its next rate cut. In a note to clients on Friday, Michael Pearce of Oxford Economics warned that further weakness in the labor market could lead the Fed to cut 50 basis points sooner rather than later.
“Given the shift toward a dovish tone by Fed officials, any negative surprise in labor market data could push them to implement another 50 basis point rate cut in November,” Pearce wrote.
Seana Smith is a host for Yahoo Finance. Follow Smith on Twitter @SeanaNSmithDo you have suggestions on deals, mergers, activism situations, or anything else? Email seanasmith@yahooinc.com.
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