Fed Kicks Off Easing Cycle with Bold 50 Basis Point Rate Cut

Good Afternoon. The Federal Open Market Committee (FOMC) delivered an outsized 50 bp rate cut to start the easing cycle. I think this is the right move, but I was not expecting it (as the Fed has been excessively data-dependent in recent history and late to react). A few weeks ago, I wrote that the Fed is behind the curve.

This move shows that the Fed wants to ensure the softening in the labor market does not get worse. Considering its dual mandate, the Fed has shifted its focus to maximum employment objectives and believes it has progressed on the price stability front. More details on the Fed rate cuts are in the curated insights section.

Markets reacted positively to the rate cut (Unlike the last two times when the Fed slashed rates by 50 bps) as the Fed chair's messaging was very positive in the FOMC press conference and tried to convey that the larger cut was to ensure a soft landing instead of any negative reasons. All key indices closed with positive gains, with the Dow Jones Industrial Average hitting an all-time high.

For the week:

• The S&P 500 is up 1.36%, the Nasdaq is up 1.49%, and the Dow 30 is up 1.62%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 63 (Greed) out of 100, up 14 points from last week. Details here

The top five trending stocks on Reddit are SPY, Nvidia, Intuitive Machines, Intel, and Apple. Read More

Here is a summary of this week’s key economic releases:

The Fed joined the global central bank rate-cutting cycle. Read More

Source: LSEG | Reuters

The Fed says the risks to achieving its employment and inflation balance are roughly in balance. To check what changed in the Fed statement from the last meeting, check here.

Federal Reserve Governor Christopher Waller said he supported a 50-basis-point cut as the PCE forecast done by his team shows inflation running below 1.8% over the last four months, i.e., falling sharply more than expected earlier. Read More

India tops China for the first time in a key MSCI equities index. India's weight in the MSCI index has risen to 2.35%, greater than China's weight of 2.24%. Read More

Qualcomm has reportedly approached Intel with a potential takeover offer. Read More

The U.S. Securities and Exchange Commission (SEC) recently voted to overhaul stock pricing rules, allowing certain stocks to be quoted in increments of half a penny rather than the previous one-cent minimum. This change aims to narrow bid-ask spreads, making trading more cost-effective for investors and improving market liquidity. Read More

Nike announced on Thursday that President and CEO John Donahoe will be retiring, and Elliott Hill, a former senior executive, will take over his role. Read More

FedEx released a disappointing quarterly earnings report and lowered its financial outlook for the fiscal year ahead. The company blamed the sluggish industrial economy and reduced demand for priority shipping services. Poor FedEx results signal a slowdown in the economy, as FedEx's performance is often viewed as an indicator of broader economic health. FedEx is ending its contract with the U.S. Postal Service. The company anticipates a $500 million financial impact from this termination. Read More

Key Points from the Fed Chair in the FOMC Press Conference:

• Payroll numbers are not reliable, and hence, the unemployment rate became more important.

• The time to support the labor market is now than when the layoffs start.

• The Fed chair doesn’t see anything in the economy that suggests the likelihood of a downturn.

• Changes to the Basel III endgame proposal are happening with my support and involvement.

• Balance sheet shrinkage and rate cuts can happen simultaneously. Read More

  
  

Reasons for the Fed’s 50 basis point rate cut:

The Fed has a dual mandate - pursuing the economic goals of maximum employment and price stability. Some facts about both these objectives:

• Unemployment: The labor market has been slowing down for quite some time now.

  • The unemployment rate today stands at 4.2%. The Fed does not have a fixed unemployment rate target. In August 2020, the Fed removed the reference to the average long-term unemployment rate of 4.4% from the monetary policy strategy (check the third point here).

  • It is interesting to note that Fed officials have raised their forecast for the unemployment rate for this year to 4.4%, i.e., closer to the risk of crossing the long-run average referenced by the Fed before 2020. Even though the Fed moved from the specific target, it seems it's still a consideration for the FOMC members.

• Price Stability (2% Inflation over time): Inflation is closer to the Fed’s target, and below are the factors that I think show why inflation is in control:

  • Last month, the SFO Fed published an analysis showing that pandemic-era savings are finally running dry, especially for middle and low-income households. This will continue to put downward pressure on inflation. Read More

  • Base Effect: Inflation has consistently exceeded the Fed’s target since May 2021. As prices have been increasing for 3+ years, the prices of general household items have already elevated quite a bit. The inflation forecast from Governor Waller’s team shows it's below the Fed’s 2% target in recent months (Check the first video in the section below).

  • Average Inflation Targetting: The Fed has moved away from the hard inflation target of 2% to average inflation targeting in 2020. This means the Fed may allow inflation to run slightly higher than the target to fight unemployment in the short term and achieve 2% over time.
    

    Due to the above factors, inflation seems likely to be controlled in the foreseeable future, or the Fed can afford to keep it a little over the 2% target.
    
    The July FOMC meeting minutes show that the two regional Fed banks (out of twelve), the Chicago and New York Fed, voted to lower rates by 25 basis points in July. The macro data released since the July meeting seems to have convinced most other FOMC members that the Fed was behind the curve and supported the larger rate cut (check the third video below).

    
    In addition, below are additional details to note related to the rate cycle:

  • Market Expect a Unique Rate-Cutting Cycle: The market forecasts cuts alongside double-digit EPS growth. Read More

    

    Source: Janus Henderson

  • Uncertain Long Run Rates
    

    

    The FOMC's latest dot plot reveals a divergence in policymakers' projections for future interest rates. Notably, the 2026 forecasts span a wide range, with individual members anticipating rates between 2.375% and 3.875%.

  • Target Rate Probabilities for Nov 7th Fed Meeting: 

    

    Source: CME Fed Watch (* Data as of 21 Sep 2024 07:28:40 CT)

    
    

Macro Growth Vs. Market Growth: Changing topic from the Fed, Wellington Management's analysis (based on the data from the last 15 years) shows that the country's GDP growth may not necessarily translate into EPS growth and, thereby, market returns. There are multiple reasons, such as index composition, EPS dilutions due to stock issuances, etc. Hence, focusing on the company's fundamentals is critical. Read More

Source: Wellington Management