The Federal Reserve announced a 50 basis point interest rate cut at its September meeting (September 19th), ushering in a new round of interest rate cuts. Given that the initial cut was 50 basis points, many believed that the Fed's subsequent rate cut path would likely align with the rate hike path that began in March 2022. However, the past week has seen a sudden shift, with expectations for Fed rate cuts being disrupted and the trajectory of the U.S. stock market once again shrouded in uncertainty.
Is the First Cut Genuine or Feigned?
Initiating a rate cut cycle with a 50 basis point reduction is historically rare, which is enough to make the market suspect that there is a "big problem" with the U.S. economy. However, the unexpectedly strong September non-farm report and the continued improvement in September CPI data have quickly cooled the market's expectations for aggressive Fed rate cuts.
Whether the Fed's initial 50 basis point cut is genuine or feigned is likely the "gossip" that investors are most eager to understand at present.
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As of now, the rate cut path for the Fed's November meeting has shifted from whether to cut by 25 or 50 basis points to whether the Fed will "skip" a rate cut altogether. In the speeches of Fed officials last week, the "hawkish" tone has also begun to intensify, with "balanced risks" and "data-dependent" becoming standard rhetoric.
The latest pricing in the interest rate futures market shows that traders expect the Fed to cumulatively cut rates by about 44 basis points by the end of the year, significantly lower than the nearly 70 basis points before the non-farm data. The Fed, which was extremely dovish just last month, now appears to have "shaken the world once"...
But things seem not to be that simple, as the Fed's September meeting minutes have revealed. The minutes show that 11 out of 12 voting members of the Open Market Committee voted in favor of a 50 basis point rate cut to the 4.75%-5% range, with only Governor Bowman casting the dissenting vote.
Truth and falsehood, reality and illusion, perhaps this is the fundamental rule of financial markets.
The Outlook for U.S. Stocks is a Matter of Debate
The Fed's future rate cut path is so uncertain that the market's view on the outlook for U.S. stocks is also "changing three times a day." As the U.S. presidential election day continues to approach, the Fed's stance becomes even more unpredictable.Allianz Chief Economic Advisor Mohamed El-Erian stated that due to the significant fog surrounding the prospects of the Federal Reserve's interest rate cuts, the guessing game around the Fed's monetary policy path is inducing substantial market tremors. The Fed's policy guidance should serve to reduce market volatility, but since 2021, the Fed's communication has instead "amplified" market fluctuations.
Both the fundamental and technical aspects of the U.S. stock market are shrouded in confusion. Recently, the S&P 500 index has continued to set new historical highs, and going with the flow should be a reasonable choice.