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On September 18, 2024, the Federal Reserve reduced interest rates by 50 basis points, marking the first monetary policy easing in four years as part of its progress toward its dual mandate. This adjustment brings the target interest rate range to 4.75%–5%.
The Fed’s move is expected to bolster economic growth and help stabilize a labor market that has been showing signs of slowing down. This signals a shift in the Fed's priorities, with the labor market slowdown now viewed as a more significant concern than inflation. The rate cut, along with future plans for further reductions, aims to stimulate economic expansion.
In its FOMC statement, the Fed emphasized that the economy “continues to grow at a solid pace” and reaffirmed its commitment to “achieve maximum employment and maintain 2% inflation over the longer term.” However, there were notable revisions in the statement concerning inflation and employment. The Fed expressed “greater confidence” that inflation is moving sustainably toward the 2% target and described the risks to its dual mandate as “roughly in balance,” compared to the prior assessment of being in “better balance.” This comes after August’s inflation data, which showed inflation at 2.5%, nearing the Fed’s 2% goal.
The statement also noted that job growth has “slowed,” a shift from the previous description of “moderated,” underscoring the Fed’s strong commitment to supporting maximum employment. This follows labor market data from August, indicating a faster-than-anticipated slowdown in job growth, though the labor market remains intact.
Economic Outlook
According to J.P. Morgan, economic indicators are moving in a favorable direction, prompting the Fed to start easing monetary policy. Fed Chair Jerome Powell noted that inflation is now “much closer” to the 2% target, and the labor market is “less tight” than it was in 2019, prior to the pandemic. He emphasized that the Fed's “primary focus” has shifted from reducing inflation to supporting maximum employment.
Looking ahead, Powell stressed that rate decisions will be made on a “meeting by meeting” basis, guided by evolving data. This cautious approach allows the Fed to carefully evaluate the changing outlook and risks. Analysts at J.P. Morgan anticipate two more rate cuts in 2024, with further reductions likely extending into 2025. These cuts aim to prevent the labor market from slowing down too rapidly.
Market Reaction
Following the Federal Reserve's announcement on September 18, U.S. equities initially surged in the afternoon, with stocks hitting an intraday all-time high. Meanwhile, bond yields, particularly on the shorter end, fell. However, by the close of the trading day, the S&P 500 had dipped 0.29%, the Dow Jones Industrial Average fell 0.25%, and the Nasdaq was down 0.31%. In early Thursday trading, markets saw a strong rebound, with S&P 500 futures rising by 1.5%.
Impact of Rate Cuts
The 50 basis point cut underscores the real risk of reinvestment, as bond yields may decline further. However, there’s still an opportunity—historically, fixed income has outperformed cash in 11 of the past 12 rate-cutting cycles. Additionally, when the Fed reduces rates outside of a recession, equities have typically delivered strong results.
On Thursday, September 19, the Shanghai Composite Index closed up by 0.69%, while the Growth Enterprise Index rose by 0.85%. In Hong Kong, the Hang Seng Index gained 2%, and the Hang Seng Tech Index surged 3.3%.
Analysts pointed out that the Federal Reserve's rate cuts are part of an effort to align with other major central banks, while avoiding market panic. The firm expects the Fed to continue cutting rates, though not necessarily at the same pace. Many economists and market participants had anticipated a rate reduction of at least 25 basis points.
As the Fed continues its easing cycle, market participants should keep an eye on emerging opportunities across asset classes. The current environment favors a strategic approach to portfolio management, focusing on sectors and instruments poised to benefit from lower rates and continued economic expansion.
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