The stock market fell after a historic Fed rate cut. Here’s what the experts think

The Federal Reserve has given investors exactly what they have said they wanted to cut interest rates by 50 basis points on Wednesday — but it still wasn’t enough. After a brief jump after the initial announcement, stocks went through a period of highly volatile trading before all three major U.S. market indexes ended lower on Wednesday.

The Dow Jones Industrial Average sank 0.25 percent, while the tech-heavy S&P 500 and Nasdaq Composite fell 0.29 percent and 0.31 percent, respectively.

Markets sold off even as Fed Chairman Jerome Powell told reporters at the news conference after the FOMC meeting that the 50 basis point rate cut was meant to demonstrate officials’ “confidence” that the current strength of the labor market can continue with an “appropriate recalibration” of monetary policy.

While no one can know the definitive reason behind stocks’ negative reaction to what should have been a mega market rate cut, Rick Rieder, CIO of BlackRock Global Fixed Income and head of the BlackRock Global Allocation investment team, addressed a theory.

Looking at the Fed’s Summary of Economic Projections, Rieder noted that Fed officials have written two more rate cuts of 25 basis points this year and another 100 basis point cuts in 2025. That’s a lot, but not what they were pricing in investors before the meeting.

“The market has priced in a rate path that is more like what an impending recession would require … versus recalibrating rates to a less restrictive or neutral policy path, which we think this cycle likely represents,” he said. wealth by e-mail.

Essentially, even though markets have cut their juicy interest rate by 50 basis points in the near term, the longer-term outlook for interest rates from Fed officials has not been as attractive as anticipated.

Thomas Simons, a senior economist at investment bank Jefferies, echoed that outlook in a note to clients on Wednesday. “The long-term rate continues to be revised upwards, implying a higher terminal rate. The 50 (basis point) cut today was a welcome surprise, but we see no sign of more big cuts to come,” he said.

The economy is ‘good’ and ‘we are not behind’

There is another potential reason underlying the negative reaction of stocks to Wednesday’s Fed decision. Some see the extraordinary rate cut by Fed officials as a sign that they acknowledged they should have started cutting rates months ago.

Powell addressed those concerns in his press conference on Wednesday. “We don’t think we’re behind… You can take that as a sign of our commitment not to fall behind,” he told reporters.

But more than a few experts just aren’t buying it. “This is a Fed that thinks it’s behind the curve,” said Robert Minter, director of ETF Investment Strategy at abrdn. wealth by e-mail.

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The skepticism is not without reason. Even Powell himself admitted that if Fed officials had seen July’s weak jobs report before that month’s FOMC meeting, they likely would have cut rates then. “If we had gotten the July (jobs) report before the meeting, would we have made the cut? We very well may have,” he said. “We did not make this decision. But you know we might have.

Robert Frick, corporate economist at Navy Federal Credit Union, even suggested that the Fed may be concerned that labor market data is not as reliable as it had imagined, after reviews of previous jobs data showed that the US economy employed 818,000 fewer people between March 2023 and March. 2024 than originally reported.

“The half-point cut is an acknowledgment that the Fed is behind the curve, but not a sign of panic,” Frick said wealth by e-mail. “The Fed was ‘data-driven,’ but doubts about that data proved correct because it did not paint an accurate picture of the labor market.”

“With inflation almost subdued, the Fed needs to quickly improve employment conditions and boost investment to create more jobs,” he added.

Once again, however, Powell tried to address concerns about the labor market and economic weakness during his press conference.

“The US economy is in good shape,” he said. “It’s growing at a solid pace. Inflation is falling. The job market is in a strong place. We want to keep it there. That’s what we do.”

“I don’t see anything in the economy right now that suggests the likelihood of a recession — sorry, a recession — is increased,” he added.

Some experts celebrated Powell’s decision to also opt for a 50 basis point rate cut. “For the first time since the pandemic, this Fed has taken aggressive action to stay ahead of the curve by cutting rates to ensure the economy doesn’t slide into recession,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. wealth by e-mail.

Perhaps this difference of opinion between various experts led to the volatile trading seen on Wednesday. Citi Wealth’s acting chief investment officer, Steven Wieting, warned that this could happen ahead of the Fed’s announcement, noting that volatility is common as investors weigh the Fed’s decisions and their myriad potential implications.

There was also one other, potentially market-suppressing comment that Powell offered on Wednesday.

When it comes to the future outlook for the neutral rate — the level at which monetary policy becomes neither stimulative nor accommodative — Powell said “we’re not going back” to the near-zero rates that became common before the pandemic.

“It seems to me that the neutral rate is probably significantly higher than it was then,” he said.

With many investors looking for evidence of where interest rates might land, not just in the near term but years from now, that comment could have exacerbated the stock selloff.

This story was originally published on Fortune.com