Why Wall Street Agrees to More Rate Cuts in Q4

The bulls are back and investors are eyeing the market higher.

Last week I wrote about why a 50 basis point interest rate cut could be a mistake, as experts told me that a bold move by the Fed could signal economic doldrums and risk triggering a market sell-off .

However, a week later, Wall Street appears to be on board with more rate cuts, as stocks jumped to record highs.

And traders are betting the Fed will maintain its aggressive pace of easing. While the central bank has signaled another 50 basis points of cuts in its two remaining meetings in 2024, traders are pricing in an additional 75 basis points, according to CME Group’s FedWatch tool.

Experts tell me that cooling inflation, not a rising recession risk, will give the Fed the green light for another big cut. Prices fell to a three-year low in August.

“If (inflation) continues to fall, interest rates should be cut at the same time,” explained Nationwide Mutual Chief Economist Kathy Bostjancic.

“The Fed reserve should go 50 basis points for the next (meeting),” Bostjancic added. “They are far from neutral, so the 50 basis point cut is not necessarily a sign that the economy is falling apart. It’s an acknowledgment that the policy is too restrictive.”

The Federal Reserve is due to issue its next interest rate decision on November 7 and will have another chance to cut rates at its December meeting.

If this week is any guide, an aggressive discount could be a catalyst for the market. Powell’s emphasis that the Fed’s move should be seen as “a sign of our commitment not to be left behind” was enough to boost investor confidence. ^DJI) rose to over 42,000.

“The Fed was able to cut 50 basis points not because it had to, but because it could, and I think that’s a really critical distinction,” said Matt Orton, chief market strategist at Raymond James , in Yahoo Finance’s Morning Brief. ‘

“It supports more investment, it supports more CapEx, and that’s been behind a lot of the economic resilience.”

John Hancock’s Emily Roland told me that heightened optimism about a soft landing is leading to “a lot of bullishness in the markets.”

“Riskier assets really celebrate this idea that the Fed can avoid a hard landing and do it proactively before we see more weakness here in the labor market,” Roland said.

BMO Capital Markets chief investment strategist Brian Belski raised his year-end price target for the S&P 500 to a high of 6,100, noting that historical performance patterns “suggest a stronger-than-normal fourth quarter normal is probably ready for the market and especially since the Fed has gone into easing mode.”

The story continues

Two key jobs reports will help guide the Fed on the size of its next rate cut. In a note to clients on Friday, Oxford Economics’ Michael Pearce warned that further slack in the labor market could prompt the Fed to cut 50 basis points sooner rather than later.

“Given the shift toward an easing bias by Federal Reserve officials, any negative labor market data surprise could push them to cut another 50 basis points in November,” Pearce wrote.

Sean Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Advice on deals, mergers, activist situations or anything else? Email [email protected].

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