Fed rate cut 50bps
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September 18 was a much-anticipated date, as many expected the Fed to lower interest rates for the first time since 2020. The key question was whether the cut would be 25 or 50 basis points. In the end, the Fed opted for a 50-basis-point reduction. Of the 11 voting members, 10 supported the larger cut, making the decision clear-cut.
One likely reason the Fed went with 50 basis points instead of 25 is that there are no FOMC meetings scheduled until November, making this the last opportunity to lower rates for some time. A smaller cut might have been insufficient, given the economic slowdown and the softening labour market. By choosing the larger cut, the Fed is giving itself more room to manoeuvre, especially since there’s no October meeting.
The Fed's updated projections, which will be revised quarterly, show some changes compared to June's outlook. For instance, the unemployment rate is now expected to reach 4.4% this year and remain there through 2025, before easing slightly to 4.3% by 2026. Previously, the Fed had predicted a more favourable 4.0% by the end of 2024 and 4.2% for 2025.
The Fed also anticipates GDP growth to remain steady at 2.0% annually, which is similar to their previous forecasts. On a brighter note, inflation is now projected to decline faster, with PCE inflation expected to drop to 2.3% this year and 2.1% in 2024, lower than the June forecasts of 2.6% and 2.3%.
Essentially, the Fed is predicting a slowdown in economic activity and a weaker labour market, which should help ease inflation pressures. As a result, they foresee interest rates falling to 4.4% by the end of this year, 3.4% next year, and 2.9% by 2026, down from earlier projections of 5.1%, 4.1%, and 3.1% respectively. This suggests that further rate cuts may be coming, possibly a 50-basis-point cut in November or two smaller 25-basis-point reductions spread between November and December.
Impacts and takeaways. Rates matter in the long term because at the end of every business transaction there is a consumer. Spending matters. However as we have espoused many times before, our focus is on the specific businesses we hold. Many of these have thrived in lower and higher rates environments. I think lower rates generally means cheaper capital and lets not forget that all asset classes compete against each other. As rates fall, investors will seek out better returns; equity vs debt. I would also expect lower rates to invigorate M&A activity.
Futures are up significantly at the time of writing
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Based on pre market 'everything' is up significantly. Whilst always nice to see green cf red our focus remains on the specific companies executing well, not so much on the daily or weekly market prices. Periods of consolidation are normal and healthy.
Regards
Adam
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All I know is that my fum had a stellar first 27 weeks of the year, breaking all my personal targets, the last 10 weeks just been treading water meh.
Be good to have a decent boost before I take my annual chunk out, might be a struggle with the election playing its part in the background and I might have to take it to year end ie December for me
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My crystal ball says massive up today, small up tomorrow closing the week on another weekly gain
@dingg said in Fed rate cut 50bps:
My crystal ball says massive up today, small up tomorrow closing the week on another weekly gain
By 'today' do you mean the results which appear on the dashboard tomorrow?
My results shown today are slightly down on the results shown yesterday, but my portfolio allocation will be different to yours.
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Today's prices will be used for valuation purposes tonight and updated at around 9.30am tomorrow on the dashboard.
The Fed released the rate cut at 7pm UK time last night. The indices closed down in the last 2 hours of trading which is not a reflection of the positive sentiment but rather, and you can imagine, there is always a lot of speculation around these announcements. Large institutions will have had hedges on given the coin flip between 25 vs 50 bps and also speculators would have been buying futures contracts to profit from the result. When the result is announced many participants will close out/cover those positions creating volatility immediately after. Price action is all about flow so it is no as simple as 'good news' = up and 'bad news' = down. It depends a lot on the derivative contracts purchased leading up to the event.
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September 18 was a much-anticipated date, as many expected the Fed to lower interest rates for the first time since 2020. The key question was whether the cut would be 25 or 50 basis points. In the end, the Fed opted for a 50-basis-point reduction. Of the 11 voting members, 10 supported the larger cut, making the decision clear-cut.
One likely reason the Fed went with 50 basis points instead of 25 is that there are no FOMC meetings scheduled until November, making this the last opportunity to lower rates for some time. A smaller cut might have been insufficient, given the economic slowdown and the softening labour market. By choosing the larger cut, the Fed is giving itself more room to manoeuvre, especially since there’s no October meeting.
The Fed's updated projections, which will be revised quarterly, show some changes compared to June's outlook. For instance, the unemployment rate is now expected to reach 4.4% this year and remain there through 2025, before easing slightly to 4.3% by 2026. Previously, the Fed had predicted a more favourable 4.0% by the end of 2024 and 4.2% for 2025.
The Fed also anticipates GDP growth to remain steady at 2.0% annually, which is similar to their previous forecasts. On a brighter note, inflation is now projected to decline faster, with PCE inflation expected to drop to 2.3% this year and 2.1% in 2024, lower than the June forecasts of 2.6% and 2.3%.
Essentially, the Fed is predicting a slowdown in economic activity and a weaker labour market, which should help ease inflation pressures. As a result, they foresee interest rates falling to 4.4% by the end of this year, 3.4% next year, and 2.9% by 2026, down from earlier projections of 5.1%, 4.1%, and 3.1% respectively. This suggests that further rate cuts may be coming, possibly a 50-basis-point cut in November or two smaller 25-basis-point reductions spread between November and December.
Impacts and takeaways. Rates matter in the long term because at the end of every business transaction there is a consumer. Spending matters. However as we have espoused many times before, our focus is on the specific businesses we hold. Many of these have thrived in lower and higher rates environments. I think lower rates generally means cheaper capital and lets not forget that all asset classes compete against each other. As rates fall, investors will seek out better returns; equity vs debt. I would also expect lower rates to invigorate M&A activity.
Futures are up significantly at the time of writing
@Adam-Kay said in Fed rate cut 50bps:
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Futures are up significantly at the time of writingAdam thanks for sharing and the insight. I understood most of it but the sentence above and talk of futures always eludes me. Can you explain in layman terms what these futures are and why they matter up or down.
Thanks.
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Hi,
Interest rate futures being leveraged(interest rate futures) which will amplify the volatility. Stock options also being leveraged, will amplify the volatility on stocks, depending on flow
Regards
Adam
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Yes, today will be stellar, show on tomorrow's read out
Friday is opex, going to be volatile, closing just positive (he says optimistically)
@dingg said in Fed rate cut 50bps:
Yes, today will be stellar, show on tomorrow's read out
Friday is opex, going to be volatile, closing just positive (he says optimistically)
You are of a more optimistic mindset than me! Or (much more likely) you simply have different portfolio allocations.
For me, Thursday (i.e results shown on Friday) was decent but not huge. And Friday (results shown on Saturday) was slightly down.
Hoping for big things on Monday (Tuesday's results), but then I hope for that every day!
