Recap of 9/18 FED meeting – Stock Reaction and Bond Pricing
Peter Gozsa
Staff Writer
On September 18, 2024, the United States Federal Reserve shocked Wall Street when it lowered its benchmark rate by 50 basis points contrary to the expected 25 basis point cut. This is the first cut since March of 2020. This aggressive and more significant move shocked analysts as many anticipated a smaller cut. This was explained by chair Jerome Powell that the move was a “recalibration” aimed at supporting economic growth while ensuring that inflation would continue to decline. The goal here is to maintain price stability without significantly increasing unemployment.
While this was not a unanimous vote as Fed Governor Michelle Bowman disagreed, calling for a smaller cut 25 basis-point cut, Jerome Powell emphasized that most committee members agreed on the need for decisive action. He also acknowledged that this cut was not a response to a threat, but rather that the U.S. economy remained strong. Powell showed extreme confidence that these indicators don’t show any downside risk.
In terms of future policy action, Powell emphasized the Fed would take a more cautious approach, noting that there is no reason to cut rates even more. The Fed’s Summary of Economic Projections showcased that policymakers expect the federal funds rate to end 2024 at around 4.4%, suggesting the possibility of additional rate cuts later in the year. The SEP also projected that the Federal Funds rate could decline to 3.4% by the end of 2025 and 2.9% by 2026, reflecting the Fed’s gradual normalization strategy.
Stock Market:
Unlike previous trends, the stock market did not react as enthusiastically to the 50-basis point cut rate. However, on Thursday September 19 the stock market railed with the S&P 500, Dow Jones and Nasdaq posting their largest daily gains since mid-August. By Friday the markets closed with a 1% weekly gain. Many investors speculated whether this would encourage another rate cut of either 25 basis point cut, or a 50-basis point cut in the next meeting in November. While Chair Jerome Powell mentioned that more rate cuts could be in the future, they will be made based on data driven results and not present course.
Bond Pricing:
Analysts project that even with the rate cuts, the bond prices are unlikely to fall due to the expectations of strong economic growth for 2025. David Rogal from BlackRock expects a 10-year treasury yield to remain between 3.75% and 4.5%. All in all, for investors reassessing their bond holdings, Ellen Stanek from Baird advices focusing on the basics such as yield risk, cost, and whether bond investments provide the desired interest rate exposure.
Overall, the Federal Reserve decided to implement a 50-basis point cut to try and recalibrate economic growth. Although a lackluster start, the new cut simulated growth in the stock market and posted their largest gains since mid-August. However, Bond pricing remains unaffected as prices are unlikely to fall due to the projected of more economic growth to come in 2025.
Contact Peter at peter.gozsa@student.shu.edu