The Federal Reserve announced a 25 basis point rate cut on Wednesday (October 29th), bringing the federal benchmark interest rate target range to between 3.75% and 4%. However, the Fed also indicated that a rate cut in December is far from certain, causing a swift downturn in the stock market that had just set a record high.
Despite a lack of recent economic data due to the government shutdown, traders had little objection to the rate cut before the Fed announced the decision.
This marks the second rate cut by the Federal Reserve in recent years. The Federal Open Market Committee (FOMC) approved the rate cut with 10 votes in favor and 2 against.
Newly appointed board member Stephen Miran once again voted against, hoping for a faster rate cut of 50 basis points. Jeffrey Schmid, President of the Kansas City Federal Reserve Bank, also voted against, believing that the Fed should not be cutting rates at all.
In addition to the rate cut, the Fed also announced plans to end its $66 billion asset reduction (quantitative tightening) program on December 1st.
President Trump had previously called for a quicker pace of rate cuts and on Wednesday, once again criticized Fed Chair Jerome Powell, stating that he would be “very happy” when Powell’s term as chair comes to an end.
Before the Fed announced the rate cut decision, the three major stock indexes had reached intraday record highs earlier in the day. The S&P 500 index rose by 0.25%, trading above 6907 points.
However, Powell’s comments during a press conference at 2:30 pm dashed market expectations, leading to a rapid decline in the three major stock indexes.
Powell said, “There are sharply differing views on how to proceed in December among the committee members. Further lowering policy rates at the December meeting is far from certain.”
By late afternoon, the Nasdaq Composite index had fallen by 0.1%, the S&P 500 index by 0.4%, and the Dow Jones Industrial Average by 161 points, a decrease of 0.3%.
CNBC analysts suggest that as long as the stock market can withstand other challenges this week aside from the Fed’s decision, it may continue its upward momentum. The upcoming earnings reports from five of the “Big Seven” tech companies, which are continuing to invest in data center construction, could influence market performance. However, disappointing performances from these large companies could drag down the entire market.
Alphabet, Meta Platforms, and Microsoft will report earnings after Wednesday’s close, while Apple and Amazon are scheduled to report on Thursday.
J.P. Morgan’s trading department notes that rate cuts by central banks during market record highs are extremely rare. According to the company’s data, this scenario has only occurred four times before and has typically been very bullish for the market. J.P. Morgan’s data shows that in such cases, the S&P 500 index has returned an average of 20% one year later.
Due to the government shutdown, there is a lack of available economic data. Aside from the Consumer Price Index (CPI) released last week, all government data collection and reporting has been suspended, meaning key economic data such as nonfarm payrolls, retail sales, and other macroeconomic indicators are currently unavailable.
However, despite this “flying blind” situation, traders unanimously bet on the Fed cutting rates on Wednesday and anticipate a third rate cut in December.
In the statement released after the meeting, the committee acknowledged the uncertainty brought by the lack of data. Describing the overall economic conditions, the committee stated, “The existing indicators suggest that economic activity has been expanding moderately. Job growth has slowed this year, the unemployment rate has ticked up slightly, but as of August remains low; recent indicators are consistent with these trends. … Inflation has risen since the beginning of the year and has been running at elevated levels.”
The statement in September mentioned a slowdown in economic activity.
Wednesday’s statement reiterated policymakers’ concerns about the labor market, stating that “in recent months, the downside risks to employment growth have increased.”
The market had already begun anticipating the Fed ending quantitative tightening in October or by the end of the year. During the COVID-19 pandemic, the Fed expanded its asset holdings, increasing its balance sheet from slightly over $4 trillion to nearly $9 trillion.
Powell stated that although the Fed believes it is necessary to reduce its asset holdings, he does not anticipate a return to pre-pandemic levels.