The Federal Reserve’s half-percentage-point rate cut could have shocked markets if it had stoked investor fears that the central bank was bracing for an economic slowdown.
Instead, Fed Chairman Powell appears to have convinced investors that the central bank is cutting rates to keep the economy on track, not to save it. Stocks rose Thursday after Powell’s news conference following the rate-cut decision.
“Chairman Powell had one job at his post-FOMC press conference today: convince markets that a 50 basis point rate cut was consistent with a thoughtful policy adjustment rather than a sign that the Fed is worried it is lagging behind,” DataTrek co-founder Nicholas Colas wrote in a note to clients Wednesday night. “He accomplished that goal… This is consistent with past mid-cycle markets, where equities can continue to rise.”
Investors have increasingly expected a soft landing, in which the Fed’s aggressive tightening cycle ends with inflation falling to its 2% target without a significant downturn in the economy. On Wednesday, Chairman Powell reiterated that this scenario is still playing out.
Powell noted that the U.S. economy is “in good shape.” He pointed out that risks of further labor market slowdown have increased. But the Fed is cutting with that in mind.
“The labor market is actually in solid shape,” he said. “And our intention with our policy change today is to keep it there.”
According to Colas, the comments do little to change the market narrative.
“[The Fed] “The decision doesn’t really change much about the current market setup,” Colas wrote. “We know that interest rates are falling. We know that the U.S. economy is in pretty good shape. We know that the labor market is cooling, but not collapsing. While the Fed may have been a little clumsy in the way it conditioned markets to expect today’s decision, that is now in the past.”
The day after Chairman Powell’s press conference, the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI) reached new record highs, while the Nasdaq Composite (^IXIC) rose more than 2%.
Markets are also showing familiar price action, with the biggest tech stocks leading the way on Wednesday. Nvidia (NVDA) rose more than 4% on Thursday, while Apple (AAPL) and Meta (META) rose more than 3%. The information technology sector (XLK) as a whole rose more than 3.3%, outpacing the S&P 500’s 1.8% gain.
Scott Chronert, equity strategist at Citi US, described the rotation into big technology companies on Thursday as “a catch-up move” in a part of the market that is likely to benefit from rate cuts but has not led the rally since the S&P 500’s last record close on July 16.
Chronert pointed out that further deterioration in the labor market remains a major risk to the current rally, as it would potentially imply a recession. This could still bring some choppiness to trading activity if economic data surprises negatively.
“We will still have to navigate [if this is a] “The difference between a soft landing and, oh boy, there’s still a risk of a hard landing,” Chronert told Yahoo Finance.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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