Global Stock Market Reacts to Fed Rate Cut

The global stock market is embracing the Federal Reserve's new stance on interest rates, viewing it as a positive sign for a "soft landing" of the economy. The Fed's decision to cut interest rates by half a percentage point, described as a "recalibration" rather than a panicked response, is seen as a move towards a neutral stance without being forced by a weakening economy.

• The Fed's move has sparked optimism in the stock market, with futures surging to new records ahead of the opening bell.
• The move has also been welcomed by investors as a sign of the Fed's willingness to prioritize economic growth over controlling inflation.

Impact on Bond Yields

The stock market's positive reaction to the Fed's rate cut has been accompanied by a decrease in bond yields. The two-year Treasury yield has fallen to near two-year lows, while the 2-to-10 year yield curve gap has widened to its most positive level since mid-2022. This suggests that investors are anticipating a period of lower interest rates and a healthy economic outlook.

Shifting Priorities: Inflation vs. Unemployment

The Fed's communication has shifted the focus from battling inflation to addressing the potential threat of unemployment. By cutting inflation forecasts and raising their unemployment rate call, the Fed is signaling that it's prepared to ease monetary policy further to support economic growth. This shift in priorities is influencing the actions of other central banks around the world.

• The Bank of England is expected to maintain its current interest rate level, while the Bank of Japan is likely to leave rates unchanged.
• In contrast, the Brazilian central bank has raised interest rates for the first time in two years, reflecting its own economic concerns.

The Fed's Path to Neutral Rate

The Fed's rate cut reflects its commitment to achieving a long-term neutral rate, which it anticipates reaching by 2026. This involves reducing interest rates by a total of 200 basis points from the current policy rate. The Fed expects to achieve this by gradually easing rates over the next few years.

• Despite the Fed's projection of 50 basis points of rate cuts by year-end, the market is pricing in more than 70 basis points of cuts by this time next year.
• The market is anticipating a more aggressive easing than the Fed is currently projecting, with some analysts predicting as much as 75 basis points of cuts by year-end.

Focus on the Job Market

With the Fed shifting its focus to the job market, the upcoming release of economic data will be crucial. The weekly jobless claims report, scheduled for release on Thursday, will be a key indicator of labor market health. The housing market, which has shown signs of a rebound, is another area to watch, as it can have a significant impact on economic growth.

Stock Market Outlook

Historically, when the Fed has begun cutting interest rates during an ongoing economic expansion, the stock market has experienced significant gains. With the Fed's current stance and the positive economic indicators, the stock market is poised for continued growth, potentially exceeding 16% in the next year.

• Futures on the small cap Russell 2000 index, a key indicator of the broader stock market's health, were up almost 3% ahead of Thursday's open.
• The Fed's rate cut has also boosted sentiment in global markets, with stock markets across the globe experiencing gains.

The Future of Monetary Policy

The Federal Reserve's recent actions have signaled a shift in monetary policy, focusing on fostering economic growth while carefully monitoring inflation and unemployment. The central bank's commitment to reaching a long-term neutral rate and its willingness to ease rates further suggests a supportive environment for stock market growth. However, the path forward will depend on economic data and the Fed's assessment of inflation and unemployment levels.