Overnight – Hawkish Fed drops a 50bps rate cut bomb on the market

Stocks snapped a seven-day winning streak to finish lower overnight after the Federal Reserve delivered a larger 50 basis point rate cut, a move usually reserved for emergencies, marking the first cut since March 2020.

The Federal Reserve cut interest rates by 50 basis points, and lifted forecasts for further rate cuts this year, as the central bank kicks off a rate-cut cycle to shore up the economy following a prolonged battle against surging inflation.

Heading into the decision, markets were split on whether the central bank would deliver a 25bps or 50 bps cut. The central bank also signalled that is expected to deliver two 25bps rate cuts this year, up from a June forecast for just one cut. The overnight announcement is best characterised as a “hawkish 50bps,” but the decision to cut by 50bps wasn’t unanimous and that the Fed only expects an additional 50 bps of cuts between now and the end of the year. 

Historically, the Fed has only begun a rate cut cycle with 50bps in response to a severe economic event, making us wary of comments from Jerome Powell

The 50bps cut, normally reserved for emergencies, seemed in stark contrast to rosy comments made by Chairman Powell in the press conference after the decision.

Powell quotes:

“I don’t see anything in the economy right now that suggests that the likelihood of a downturn is elevated”

“[Economic] growth at a solid rate, inflation coming down, you see a labor market that’s still at very solid levels, so I don’t really see that [recession risk] now.”

The direction of equities is a little uncertain, with the long-term guidance from the Central bank on interest rates being frontloaded rate cuts, BUT a higher base, triggering investors to be wary