Image Source: PexelsToday’s Federal Open Market Committee (FOMC) decision to cut interest rates has had a negative effect on today’s stock market. Those record highs we had been seeing in the Nasdaq and elsewhere my perhaps something we won’t be speaking about much in the near future.
Fed Cuts 25 bps to Lowest Rate in 2 Years, Markets Hate It
With the 25 basis-point (bps) cut today, the Fed funds rate is now down to a range of 4.25-4.50%, where we haven’t been since January of 2023. But this isn’t the reason the major stock market indexes are down from -2.4% (Dow) to -4.4% (Russell 2000) — that has to do with what Fed Chair Jerome Powell said in his press release following the release.In an almost matter-of-fact presentation this afternoon, Powell said the FOMC was only looking to cut two more times in the new year, instead of the previous dot-plot’s indicated four cuts. At 25 bps per, this would take the interest rate range down to 3.75-4.00%, not 3.25-3.50%. This would be significant for things like home mortgages, which may now remain elevated for the foreseeable future, keeping prospective home buyers from entering the market.Bond yields wasted no time moving higher. They were pretty directly in line with the 20 bps gap between 10-years and 2-years, but have bloomed to 4.50% on the 10-year and 4.30% on the 2-year. It’s worth noting that the 10-year high had reached 4.73% — will this be taken out based on this higher projection of interest rate levels?
Did Powell Achieve a “Soft Landing”?
Meanwhile, Powell’s press conference went off without a hitch. He was measured and not defensive or combative, as we’ve seen him during press conferences in the past. He said he is “very optimistic about the economy” and “expects another good year” in 2025. Also, he mentioned that the Fed remains committed to achieving 2% inflation — not 2.5% or 2.8%, which is where the last PCE read was — but 2% flat. And he believes the Fed can control rates to bring this down eventually.But with inflation over the past year going sideways and the labor market cooling in an “orderly” fashion, it looks as though Powell & Co. has pulled off what few analysts believed possible just a few short years ago: a “soft landing.” With no recession on the horizon forecast, and a labor market tightening but not adding to inflation, it would appear Powell’s dual mandate has been reached.Cold comfort for those looking at their investment statements today, however: the Dow fell 1153 points today, or -2.58% — and it got off easy. The S&P 500 dropped -178 points, -2.95%, while the Nasdaq jettisoned -716 points, -3.56%. The small-cap Russell 2000, most sensitive of all to higher rates, shed -102 points, -4.39%.That said, perhaps Powell did markets a favor today by cutting through the froth. The AI trade, in particular, had been blast off into another orbit; for stocks to come back down toward reasonable valuations is far from the worst thing in the world.So it looks like the January 31st FOMC meeting is off the table for another cut, with the following Fed get-together not until March 20th. This will provide enough economic data — not to mention the new Trump administration will have already begun to enact their policies by then — for the Fed to reconsider whether to start pulling rates back down again. And maybe by then they will be of a mind to bering back some of those cuts they just took away? Crazier things have happened.More By This Author:Markets Take A Breather On Econ Data; COST, AVGO, RH Report Late
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