Last month, the Federal Reserve implemented its first rate cut since early 2020, reducing the fed funds rate by 50 basis points (0.50%), bringing it down to 4.75 – 5.00%. This move marks the end of the most aggressive rate hike cycle in over four decades.
Some investors were initially concerned that such a significant cut might indicate the Fed’s worries about the economy. While the unemployment rate has risen from its cyclical low and job growth has slowed, most economic indicators still suggest ongoing expansion. Fed Chief Powell’s remarks helped to ease these concerns, with investors currently trusting his assertion that a soft economic landing is still achievable.
Why did the Fed opt for a 50 basis point cut instead of a more modest 25? Typically, the Fed prefers gradual changes unless responding to significant economic shifts, like high inflation. During his press conference, Powell emphasized that the economy is in good shape but suggested the larger cut is a preemptive measure to guard against a potential slowdown. He stated, “We’re not waiting for rising layoffs because the time to support the labor market is when it’s strong, not when layoffs begin.”
It’s a delicate balance. Delaying rate cuts or reducing rates too slowly could risk a recession, while cutting rates too quickly might overheat the economy and reignite inflation. While the impact of a 25 or 50 basis point cut may seem minor in the long term, it is significant news today.
Investor Reaction
Profit growth, moderating inflation, stable or falling interest rates, and modest economic growth have traditionally been favorable for equities. In September, the Dow and the S&P 500 Index reached record highs. Despite initially underestimating inflation, the Fed has regained some credibility as inflation has slowed without triggering a recession. This year’s market performance is a positive outcome.
| Key Index Returns | ||
| Index | MTD% | YTD% |
| Dow Jones Industrial Average | 1.8% | 12.3% |
| NASDAQ Composite | 2.7% | 21.2% |
| S&P 500 Index | 2.0% | 20.8% |
| Russell 2000 Index | 0.6% | 10.0% |
| MSCI World ex-USA** | 0.8% | 10.6% |
| MSCI Emerging Markets** | 6.5% | 14.4% |
| Bloomberg US Aggregate Bond | 1.3% | 4.4% |
Source: MSCI.com, Bloomberg, MarketWatch
MTD returns: August 30, 2024–September 30, 2024
YTD returns: December 29, 2023–September 30, 2024
**in US dollars
However, strong market performance can sometimes lead to overconfidence and excessive risk-taking. We advise caution against this. While overweighting stocks might boost returns, unexpected volatility from various sources can lead to short-term declines that exceed one’s comfort level.