The Fed’s big rate cut leaves equity and bond markets little changed

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Investors braced for wild market moves ahead of Wednesday’s Federal Reserve meeting. But by the end of the day, there were few signs of major change or the dawn of a new era.

The U.S. central bank kicked off a new cycle of interest rate cuts with a bigger-than-normal cut, but despite slight changes during Chairman Jay Powell’s press conference, major benchmarks for stocks and government bonds ended the day barely changed from where they were before the Fed. announcement.

The S&P 500 ended the day 0.3% lower, in contrast to prices in the options markets earlier in the week, which had predicted a swing of more than 1%. The two-year Treasury yield, which is particularly sensitive to monetary policy, fell just 0.02 percentage points between the policy announcement and late Wednesday.

“In the grand scheme of things, compared to the volatility this market has seen in recent months, the response has been quiet,” said Michael de Pass, global head of rates trading at Citadel Securities.

“We’ve gotten more clarity that the Fed’s reaction function is biased toward the labor market, but the market has already priced that in quite aggressively.”

A rate cut was widely expected, but there was still uncertainty about the size of Wednesday’s cut and how quickly the Fed will signal other moves as it tries to balance the two sides of its mandate to control inflation and to protect the labor market.

“This is a Fed that is very careful and deliberate,” said Gargi Chaudhuri, BlackRock’s chief investment and portfolio strategist for the Americas. “They are doing everything they can to make sure the job market remains as strong as it is now. . . But they also tell us not to get used to (50bp reductions). This is not the new beat.”

Lower interest rates are traditionally seen as a positive for stock markets because they stimulate the economy, reduce the debt burden of companies and encourage investment in riskier assets. However, investors were cautious that a more aggressive cycle of rate cuts could signal concerns about a more severe economic downturn that would hurt corporate profits.

Chaudhuri said Wednesday’s slight drop in stocks was a reflection of investors taking profits ahead of a weak seasonal period rather than fresh concerns about the economic outlook. The S&P 500 is up nearly 18% this year and briefly hit record highs on Tuesday and Wednesday before retreating.

“I wouldn’t be surprised to see a pullback (in stocks) in the next couple of weeks, but just because we’ve had such a strong performance so far,” she added.

Powell has previously stressed that the central bank intends to protect the labor market, and officials, including Fed Governor Christopher Waller, have signaled before the meeting that they are not afraid to cut more if necessary.

“The stage is set for a 50bp cut,” said Sinead Colton Grant, chief investment officer at BNY Wealth Management. “If you go back six weeks, there was a narrative that would imply the Fed is worried about something the market isn’t seeing. . . I think the September jobs report really helped convince the market that we probably need a little more than 25 bp.”