Global markets are responding to the Federal Reserve's decision to kick off its rate-cutting cycle with a half-percentage-point reduction, signaling the start of what many hope will be a controlled path toward stabilizing the US economy. Investors are closely watching the central bank’s approach, with Fed Chair Jerome Powell cautioning that future rate cuts may proceed at a slower pace than some anticipated. As the dust settles, the Treasury market, global equities, and major currencies have reacted in various ways to the Fed's move, while focus shifts to the upcoming decisions from the Bank of England (BOE) and Bank of Japan (BOJ).
Fed’s Decision and Market Reaction
Fed Kicks Off Rate Cuts with a Bang
The Fed delivered a bold half-point cut to the federal-funds rate, bringing the new target range to 4.75% to 5%. This move, larger than many expected, is part of an effort to address the slowing labor market while inflation nears the Fed's 2% target. Powell's commentary hinted that while this large cut was necessary to front-load easing, further rate reductions might occur at a slower pace as the Fed remains cautious about maintaining stable borrowing costs over time.
Although Treasuries fell after the announcement, signaling market adjustments to the Fed's caution on the pace of cuts, stocks reacted more modestly. $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ dipped by 0.3%, while the Dow Jones Industrial Average slipped by 0.2%. Despite the initial optimism surrounding the cut, the market's subdued response reflects ongoing uncertainty about the broader economic outlook and future rate cuts.
Rate Cut Expectations Shift
The Fed’s dot plot now suggests a federal-funds rate range of 4.25% to 4.5% by the end of 2024, lower than June’s median forecast of 5.0% to 5.25%. This adjustment indicates less aggressive easing than markets initially expected, although futures markets are pricing in a potential fall to 4.0% to 4.25% by year’s end. To reach that level, the Fed would need to cut rates by another 0.75 percentage points at its November and December meetings, a scenario that investors are watching closely.
Fed
Global Market Reactions
Asia Rallies on Fed Optimism
Asian equities rallied after the Fed’s decision, buoyed by hopes that a successful easing cycle could guide the US economy toward a soft landing. Japan’s Topix and Nikkei 225 surged as the yen tumbled by more than 1% against the dollar, driven by widening US-Japan yield differentials.
Commodities and Currencies
-Gold inched higher, continuing to benefit from expectations of prolonged Fed easing. As a haven asset, gold has attracted demand amid concerns about economic instability and geopolitical tensions in the Middle East and Ukraine.
Oil prices, however, remained flat. Weak demand signals from the US have counterbalanced the geopolitical risks that often drive price spikes, keeping crude in a holding pattern.
Bank in Focus
Bank of Japan Meeting in Focus
Attention is now on the BOJ, which started its two-day meeting on Thursday. Most analysts expect the BOJ to leave its ultra-loose monetary policy unchanged, with over half forecasting the next rate hike to come in December.
Bank of England Remains Cautious
BOE faces a different challenge as it navigates a slower easing path. While the BOE recently enacted its first rate cut in over four years, Governor Andrew Bailey is expected to maintain a cautious stance, likely refraining from further easing until November.
Conclusion
While the Fed’s aggressive half-point cut has sparked optimism for a soft landing, Powell’s comments cautioning against assuming continued large cuts underscore the central bank's careful balancing act…
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The information provided in this report is for informational purposes only and should not be construed as investment advice. The views expressed are those of the author and do not necessarily reflect the opinions of any affiliated institutions. Investing in financial markets involves risk, and you should consult with a qualified financial advisor before making any investment decisions. The author is not responsible for any losses incurred as a result of actions taken based on this information.
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