Fed surprises with rate cut path

Rise and shine everyone.

I think many of us are still digesting the Fed’s surprise move yesterday. I’m not talking about the 50bps point cut, but rather the path of rate cuts that they’ve laid out for us in the next two years.

We covered most of this live yesterday on our Twitter stream but, here’s a quick recap:

• The projections show 100 bps (1%) of cuts (including yesterday’s 50) for 2024. That’s quite an aggressive stance and it’s quite likely every meeting will be “live” (open for cuts).

• 2025 has another 100 bps or 1% of cuts - no surprise there.

• But again 2026, brings a surprise. Not only are they forecasting a higher terminal rate, they expect to reach it by 2026. So that’s another 50 bps, i.e., 0.5%.

• The Fed had previously assumed 9 cuts until the end of 2026 but now that’s become 10 (if you consider each cut at 25bps).

• Changes to the statement included the Fed acknowledging that the labor market had “slowed”. But, talking about inflation they said the risks were still elevated.

Many are saying that Chair Powell’s press conference was hawkish. I found him to be off his game yesterday. He was not his usual composed self and spent most of the meeting justifying the jumbo cut while trying to convince us that the labor market and the economy are okay. They are taking pre-emptive measures here to keep the labor market from deteriorating.

I have to admit, I wasn’t convinced. And neither was anyone else, judging by the market’s reaction - we saw a sell-off after the 2 pm spike. Some of it was taking off hedges but, the market moved lower into the close as well.

On the one hand, I agree that the economy and the labor market are not in dire straits, but on the other, the Fed is sending a message that they actually have been behind the curve, even if they deny it.

We think equities can continue to do well during the cutting cycle but, we want to be careful in the coming 6 weeks as we’re in the worst period for seasonality and we enter the last month before the US elections.

US Equity Futures are trading higher this morning. The USD and Yields (particularly at the short end) have adjusted lower. Commodities have all moved higher.

With the Fed out of the way for the week, our focus now turns to the Bank of England and the Bank of Japan. We also have China deciding of the LPR (Loan Prime Rate) tonight but, we don’t expect any change there.

FedEx reports before market open and Lennar & Darden Restaurants after market close.

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