50-Point Rate Cut Sparks Mixed Market Reactions

Going into last week: the odds of a 50-basis point cut to the fed funds rate began to firm up according to the CME Group’s Fed Watch tool. On Wednesday, after years of meetings with unchanged or increasing interest rates, the FOMC finally cut the Fed Funds rate for the first time since the Covid-Induced reduction. 

While the history of the Effective Fed Funds rate demonstrates that moves of 50 basis points or larger are not without historical precedent, many market participants were expecting a more conservative 25 basis point reduction. Moreover, since 1990, the times that there had been a 50-basis point reduction or more were marked by a noteworthy event like Covid, the 2008 Housing Crisis, or the dot com bubble.  So, that said, the November and December meetings both still favor the odds of at least one additional 50-basis point cut before the year ends. 

This action was quickly picked up by politicians, some of which applauded the event or criticized the timing of the rate cut so close to the November election. This event served as a prime example that either side of the political aisle will likely grab ahold of various economic headlines for the next number of weeks in an effort to build their case for the economy and the election. 

For the markets, this news was welcomed with a favorable weekly return in all five of the major markets.  

However, the initial reaction in the S&P 500 showed that market participants were not overly enthused initially. Following the announcement and throughout the FOMC press conference, the S&P 500 sold off to close the day near the lows of the session. Sentiment improved Thursday as the market generated all the gains for the week within the one session. 

The various sectors ended mixed with Real Estate, Consumer Staples, and Health Care in negative territory.  

The yield curve flattened ever so slightly. Increases in yield for the intermediate to longer-term end of the curve while the three month and six-month yields dropped 22 and 17 basis points respectively. 

While the Fed Funds rate dropped, the flattening of the yield curve caused the Bloomberg Barclays Aggregate Bond Index to fall last week. The loss of just under a quarter percent highlighted that while headline moves in segments of the market may grab attention. However, there are other factors or implications that can shape the various indices. 

https://www.cnn.com/2024/09/18/politics/fed-rate-cut-2024-election/index.html

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