Fed Chair Powell's 50bps Rate-Cut Causes Market Chaos

Powell's Justification for the Rate-Cut

During a press conference, Fed Chair Pay Powell stated that the US economy is in a good position and that the decision to cut the rate by 50bps is intended to maintain this status. This decision, which is equivalent to a crisis-level rate-cut, is being implemented despite record highs for stocks and home prices, and just two months before the election.

Reactions to the Rate-Cut

Kamala Harris welcomed the Fed's rate decision, stating it is good news for Americans. The decision comes after promises made in April that there would be a rate cut before the end of the year. However, it's unclear whether this promise was made by Trump or Biden.

Market Reactions to Powell's Press Conference

During Powell's press conference, he attempted to dampen expectations by stating that the committee is not in a rush, and will move at a pace they deem appropriate. This caused stocks to drop as Powell clarified that the 50bps cut should not be viewed as a new pace.

Rate-Cut Expectations

The DOTs revealed that members are significantly lowering their rate-cut expectations. In June, four FOMC members expected no rate-cuts in 2024, seven members expected one rate-cut, and eight members expected two rate-cuts. However, by September, only two FOMC members had priced in two rate-cuts by year-end, seven more saw three rate-cuts, eight more saw four cuts by the end of 2024, and one member expected five rate-cuts in 2024.

Changes in Fed Rate Expectations

Fed rate expectations for 2024 and 2025 have also fallen, with the latter already pricing in a super dovish Fed. Powell further surprised the market by stating that we’re probably not going back to the era when trillions of dollars worth of sovereign bonds were trading negatively. He also suggested that the neutral rate is probably much higher than it used to be, although he did not specify where that level is.

Impact on the Market

The Small Caps surged almost 2.5% at their highs on the FOMC statement and SEP, and the S&P 500 also briefly hit a new record high. However, once Powell started speaking, all the majors reverted lower. The Dollar Index also reacted significantly to the FOMC statement, but rallied back as Powell spoke. Gold prices also soared to a record high $2600 before sliding back as Powell spoke.

Impact on Bonds and Stocks

Bonds and stocks have been in their own worlds since the last FOMC meeting in July, with stocks slightly higher and bond yields down dramatically. Treasury yields all tumbled on the FOMC statement and pushed back higher as Powell spoke. The 2Y remained lower while the long-end rose 7bps on the day. Bitcoin also reacted to the FOMC statement by rising above $61,000 before sliding back to unchanged on the day.

Crude Prices and Powell's Legacy

Crude prices declined on the day, affected by the DOE data showing a big draw at Cushing and then by Powell and his colleagues going full dove-tard. Some are questioning if Powell's legacy will be similar to that of Arthur Burns.

Bottom Line

There's no doubt that if inflation re-accelerates from here, Trump will likely bear the blame. The Fed's decision to cut rates has certainly caused a stir in the market, with significant reactions across stocks, bonds, and currencies. It remains to be seen how these decisions will impact the economy in the long run. What are your thoughts on this? Share this article with your friends and sign up for the Daily Briefing, which is available every day at 6pm.