The Fed just convinced markets it’s not behind the curve

by skolnes September 19, 2024

written by skolnes September 19, 2024

The Federal Reserve’s half-percentage-point interest rate cut could have shaken markets had it exacerbated investor fears that the central bank was preparing for an economic slowdown.

Instead, Fed Chair Powell appears to have convinced investors the central bank is cutting rates to keep the economy on track, not to save it. Stocks surged Thursday following Powell’s press conference after the rate cut decision.

“Chair Powell had one job at his post-FOMC press conference today: convince markets that a 50 bp cut was consistent with a thoughtful policy adjustment rather than a sign that the Fed is worried it is behind the curve,” DataTrek co-founder Nicholas Colas wrote in a note to clients Wednesday night. “He accomplished that goal … This is consistent with prior mid-cycle markets, where equities can continue to rally.”

Investors had been increasingly expecting a soft landing, where the Fed’s aggressive tightening cycle ends with inflation falling to the 2% target without a significant downturn in the economy. On Wednesday, Chair Powell reiterated that scenario remains in play.

Powell remarked the US economy is “in good shape.” He pointed out that risks to further cooling in the labor market have risen. But the Fed is cutting with that in mind.

“The labor market is actually in solid condition,” he said. “And our intention with our policy move today is to keep it there.”

To Colas, the comments change little about the market narrative.

“[The Fed] decision doesn’t actually change very much about the current market setup,” Colas wrote. “We know that rates are coming down. We know that the US economy is in reasonably good shape. We know the labor market is cooling but not yet tipping over. While the Fed may have been somewhat clumsy in how it conditioned markets to expect today’s decision, that’s now in the past.”

In the day following Chair Powell’s press conference, the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) rushed to new record highs, while the Nasdaq Composite (^IXIC) rose over 2%.

Markets are showing familiar price action too, with the largest tech stocks leading the charge higher on Wednesday. Nvidia (NVDA) rose more than 4% on Thursday, while Apple (AAPL) and Meta (META) popped more than 3%. The Information Technology sector (XLK) as a whole rose more than 3.3%, outpacing the S&P 500’s 1.8% gain.

Citi US equity strategist Scott Chronert described the rotation into large-cap tech on Thursday as “a catch-up move” into a section of the market that will likely benefit from interest rate cuts but hadn’t been leading the rally since the S&P 500’s last record close on July 16.

Chronert pointed out that further deterioration in the labor market remains a key risk to the current rally, as it would potentially imply a recession. This could still bring some choppiness to trading action if economic data surprises to the downside.

“We’re going to have to be navigating still [if this is a] soft landing versus, gosh, there’s still some lingering hard-landing risk out there,” Chronert told Yahoo Finance.