The Federal Reserve surprised many market participants — us included – by reducing interest rates by 50 basis points during the Federal Open Markets Committee meeting on Sept. 18. The decision was not unanimous: Federal Reserve Governor Michelle Bowman became the first to dissent since 2005. She was in favor of a rate cut but preferred to start this easing cycle with a more modest reduction of 25 basis points to avoid prematurely declaring victory over inflation.
A quick rally fizzles
Equity markets rallied immediately after the FOMC announcement, driving the S&P 500 Index to a new all-time high. But by the end of the trading session the S&P had given up all of its gains to finish the day in negative territory. It was a classic example of a “buying the rumor and selling the news” trading action.
Normal move, not a crisis decision
The key word of Federal Reserve Chairman Jay Powell’s news conference was “recalibration.” This large initial cut in interest rates was not decided because Fed officials were particularly concerned about any specific weakness in the economy. It was not a crisis rate cut. Instead, it was the beginning of monetary policy normalization to take into account the significant progress achieved in bringing inflation down toward the Fed’s 2% goal.
Powell went to great lengths to emphasize that while the economy is currently in good shape, the Fed intends to continue supporting the economic expansion by lowering rates further if inflation data continue to be satisfactory.
Misery Index is not so miserable
Judging by the so-called Misery Index, the economy is relatively strong. The index, the sum of the unemployment rate and the inflation rate, currently stands at 6.7%. That showing is better than 85% of the months in past 50 years. (Source: JP Morgan Asset Management.)
The old saying “sleep on it” seems to bring investors to the realization that the Federal Reserve actions intending to defend the economy and to achieve the elusive soft landing were unequivocally positive for risk assets. On Thursday, in a delayed reaction to the Fed news, the Dow Jones Index jumped 500 points to close above 42,000 for the first time ever. Not to be outdone, the S&P 500 finally eclipsed its previous record of July 16 to finish at 5,713.
Market reading election tea leaves
With Election Day 44 days away, politics will take center stage over the next few weeks. Investors should be prepared to expect bouts of volatility as markets start anticipating various election outcomes. But we believe investors should keep their eyes on the prize: Over the long run, supportive monetary policy brings positive investment returns.