The U.S. Federal Reserve officially started a rate-cutting cycle on Wednesday. It announced a half a percentage point rate cut. This marks a big change after 11 interest rate increases from March 2022 until July last year.
For those who have followed the Federal Reserve closely for years, Chair Powell —by stating several times that “the economy is in a good place” — has just recaliberated what it means to start a cutting cycle with a 50 bps move.#economy #federalreserve #markets
— Mohamed A. El-Erian (@elerianm) September 18, 2024
Combined with the revisions to forecasts, the Federal Reserve just delivered a dovish 50 bps rate cut in a seemingly dramatic U-turn from its “no change” July meeting.
While waiting for Chair Powell’s explanation at the press conference, I suspect the main driver is greater…— Mohamed A. El-Erian (@elerianm) September 18, 2024
Analysts say this move will likely give China and other Asian economies more room to carry out easing policies and boost growth. The rate cut “marks the beginning of a new policy cycle, carrying a significant signal,” GF Securities said on Thursday. Sarah Tan, an economist at Moody’s Analytics, noted that the reduction could offer the People’s Bank of China more flexibility to ease monetary policy.
This would help address weak domestic demand. With the U.S. decreasing its rates, analysts believe this will reduce the pressure on the yuan outflow. It could create a more favorable environment for China to implement its own monetary easing measures.
The Fed cuts rates by 50bp & signals gradual cuts ahead.
A hair more than I might have done but the differences are small, the path is about the same, & we can all sit back and enjoy this moment of recalibration towards an economy where inflation is much, much less of a threat.
— Jason Furman (@jasonfurman) September 18, 2024
The move by the Federal Reserve is seen as a preemptive strike. It aims to prevent a potential economic downturn and encourage investment. In summary, the Federal Reserve’s decision to cut rates could serve as a catalyst for other economies, particularly China.
Powell casts the Fed's 50-bps cut in non-scary terms: "We are committed to maintaining our economy’s strength."
"This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained."
— Nick Timiraos (@NickTimiraos) September 18, 2024
It may lead them to adopt more accommodative monetary policies. This would foster a more robust global economic environment. Markets in Europe and Asia experienced big gains Thursday following the Federal Reserve’s decision.
U.S. futures also showed promising signs after a mixed response on Wall Street to the Fed’s move the previous day. The S&P 500 future increased by 1.3% and the Dow Jones Industrial Average future rose by 0.8%.
Fed’s rate cut impacts global markets
In European markets, Germany’s DAX added 0.8%, Paris’s CAC 40 advanced 1.3%, and London’s FTSE 100 gained 0.9%. Asian markets saw notable increases as well. Tokyo’s Nikkei 225 index climbed 2.1%, with significant gains from major export manufacturers.
Hong Kong’s Hang Seng index grew by 2%, and the Shanghai Composite index rose by 0.7%. Taiwan’s Taiex closed higher by 1.7%, and South Korea’s Kospi edged up 0.2%. The Bank of England and other central banks are also holding monetary policy meetings this week.
Although no changes to interest rates are expected, the broadcasters’ remarks may still influence market dynamics. The Federal Reserve’s half-percentage point rate cut had been widely anticipated. This led to relatively subdued reactions on Wall Street.
Thomas Mathews of Capital Economics commented, “Markets barely reacted to the Fed’s 50 (basis point) rate cut, on balance, and our base case is that further cuts won’t move the needle too much either.”
This interest rate cut marks the end of a period where the Fed maintained rates at a two-decade high to tame the worst inflation in generations. The Fed’s decision is likely to ease the economy and boost prices for various investments, including stocks, gold, and bonds. These had already begun to rally in recent months in anticipation of the cuts.
Federal Reserve Chair Jerome Powell highlighted that the time to support the labor market is when it’s strong. He noted, “That’s the situation we’re in,” during a press conference. Some critics believe the Federal Reserve may have kept interest rates too high for too long.
This potentially slowed the economy more than necessary. This rate cut has market observers closely watching for additional moves that could impact the economic outlook and investment strategies moving forward.
