On September 18, 2024, the FOMC announced a 50 bps interest rate cut to kick-start the Federal Reserve's monetary easing cycle. Fed Chair Jerome Powell explained that this aggressive cut was a "recalibration" to strengthen the labour market as inflation sustainably moves towards the Fed's 2% target. However, the massive rate cut has re-ignited inflation concerns with the markets fearing that the sudden loosening of financial conditions could rekindle pricing pressures.
The Fed tends to lower interest rates when it expects the economic situation to worsen in the near term. The rate cut can soften the blow although it might not be able to prevent a recession. However, the impact of the rate cut can take varying amounts of time.
For example, when the Fed started lowering interest rates in July 1995, a recession occurred after a whopping 69 months. However, when the Fed started cutting rates in July 1990, a recession occurred immediately. A recession took only two months to rear its head after the rate cut in January 2001.
Treasury Inflation-Protected Securities (TIPS), a good gauge of inflation expectations, rose following the Fed's rate cut announcement. The 10-year breakeven inflation was up 2.16%, reaching its highest level since early August. Against this backdrop, the markets could witness continued volatility in the short term, with upcoming economic releases determining the direction of investor sentiment.
Impact of the Rate Cut on the Stock Markets
Although Fed rate cuts tend to boost the markets, a 50 bps cut could trigger economic concerns, dampening investor confidence. Plus, US interest rate changes tend to have ripple effects across the global markets. This could lead to uncertainty in the short term.
This was witnessed in the S&P 500 and DJIA reaching record highs within minutes of the news release. The S&P 500 rose 1.7%, the NASDAQ was up 2.5% and the Dow Jones jumped by 522 points.
But this positive sentiment didn’t last long, with all three indices closing at a loss of 0.3% each by the end of the trading day. Before the rate cut, the S&P 500 had risen 18% YTD, partly fuelled by expectations of an impending rate cut.
Since the Fed rate cut was also priced in, the market response to the actual event was blunted. However, the Russell 2000 rose 0.2% since smaller companies are expected to benefit more from decreasing borrowing costs.
How the Forex Markets Reacted
The beginning of the Fed’s easing cycle and the aggressive rate cut led to the US dollar weakening after the announcement. Market expectations had shifted to the Fed taking a more dovish stance in the days leading up to the announcement, with a 65% probability of a 50 bps cut being priced in.
However, economists were expecting a 25 bps cut. The dollar index, which tracks the USD against a basket of 6 currencies, fell 0.38% following the rate cut, reversing gains it had recorded earlier in the trading session.
On the other hand, the euro rose 0.4% to $1.1163, while the greenback was up 0.33% against the Japanese yen at ¥142.73 due to expectations that the Bank of Japan would leave its interest rates unchanged. The dollar weakened against the Swiss franc, losing 0.08%, while dropping 0.34% against the Chinese yuan.
Meanwhile, the pound sterling reached its highest against the USD since March 2022, following the Bank of England voting to keep interest rates on hold. The GBP was up 0.5% against the US dollar, reaching a high of $1.3314. The Australian and New Zealand dollars received support from positive data surprises domestically, with the Australian employment numbers exceeding expectations for the third consecutive month in August.
Supporting Traders During Uncertain Markets
The markets aren't ruling out the possibility of another 0.5 bps rate cut in 2024, given that Fed Chair Powell has prioritised boosting employment to bolster the economy as long as inflation continues to cool. Such uncertainty will keep the markets volatile.
This is the time for brokers to empower their traders with cutting-edge trading tools, real-time market insights and access to market sentiment scores for informed decision making.
Acuity offers a comprehensive suite of AI-powered solutions that brokers can effortlessly integrate into their existing platform to keep traders active with powerful resources. For instance, Acuity's Research Terminal has been specially developed as an all-in-one tool for traders to access actional insights. In addition, the NewsIQ widget helps traders analyse the most relevant and impactful news for their chosen assets.
To learn how you can capitalise on these solutions to support your traders in making the most of market opportunities, request a demo and experience the widgets for yourself.
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