Interest Rate Cut Insights

As expected, the Fed cut rates by 25 basis points and announced an end to quantitative tightening—both steps toward further easing. However, the meeting revealed some notable divisions within the Federal Open Market Committee. One member voted against the rate cut, while another favored a larger, 50 basis point cut. This dissent was a bit unexpected. Chair Powell also highlighted strong differences of opinion about a potential December rate cut and discussed the “neutral rate”—the level at which the Fed is neither stimulating nor restraining the economy. Powell suggested a range between 3 and 4%, higher than the 3% median estimate from FOMC members. These factors led markets to pause and reassess the likelihood and pace of future rate cuts. While markets still anticipate a December cut, the path ahead may be shallower than previously expected. Both stock and bond markets reacted with caution. For investors, this complexity is a sign that the Fed is weighing risks carefully—balancing the dangers of being too easy or too tough in today’s environment.  

Labor demand cools further amid imminent rate cuts With the job opening rate falling back to normal while the labor supply increased, the labor market was fully in balance in July. This is an important reason why, in our opinion, the Fed should have cut rates at the previous meeting. The drop in job openings partly explains why job gains were unexpectedly low in July. This data raises some concerns about our forecast for a strong rebound in August job gains, as demand for labor is cooling across many sectors and regions. Thus, the downside risks are increasing ahead of the key job reports coming out on Friday. The next set of job numbers released this week will be among the most consequential in a while. If the numbers appear much weaker than the median consensus—which predicts a sizable rebound—there is a significant chance that the Fed will consider a super-sized 50 basis point cut in September. We believe that anything below 100,000 net jobs added, along with a higher unemployment rate, should prompt a large rate cut. This is a Fed that clearly doesn’t want to see further deterioration in labor market conditions and is ready to act if necessary. The recent minutes of the July meeting implied as much, with some members not opposed to a July rate cut. However, that still sets a high bar at the moment, as we do not anticipate a higher unemployment rate for August, and job gains should remain above 150,000. The reason is that hiring and layoff rates changed little in July. So, even though job gains are slowing, layoffs have not increased alarmingly enough to justify an emergency 50 basis point rate cut.

It's quite striking to see the extent to which Friday's Jobs Report has sparked a shift in how analysts view the economy and, in this context, assess last week's Federal Reserve decision to keep rates unchanged. This is not to say that the Report, and especially the revisions, were not impactful; they certainly were. Rather, it's the degree to which analysts are now concluding that the new labor market landscape – fragile in the context of a weakening economy – is consistent with other data points that were already available, particularly bottom-up indicators of real activity. Consistent with my observations leading up to last week's Fed meeting, a growing number of analysts now believe the Fed should have cut rates last week/would have cut rates had the highly data-dependent officials possessed this data. One of the key analytical issues that remains unanswered is whether the economic weakening, to the extent it is occurring, is a function of a wrong direction of travel in long-standing economic dispersion – that is, rich versus less well-off households, big firms versus small ones, etc. – or if it stems from a new development. #economy #markets #jobs #employment

Time to sound the alarm: our “Fed cuts checklist” conditions are now met - and likely very close to what the Fed needs to make a first rate cut. The Fed cares about two things: price stability and full employment. To justify a cut, we expected they’d need to see (1) long and short term #inflation expectations well anchored, (2) core PCE is moving towards 2.0%, with confidence, (3) the unemployment rate is above 4.0%, and (4) wage growth is commensurate with medium term price stability. For the last two years, only condition #1 was consistently met. But over the course of the last 3 months, the rest of the conditions have finally come in line. Today's #CPI print was a big step in that direction. Price growth came in below expectations, contracting 0.1% in headline terms and growing a little under 0.1% in core terms. Underneath the surface: energy prices declined, core goods are feeling pressure from deflation in e-commerce and increasing price wards, discretionary services are seeing a a little more pressure on pricing power as competition increases, and shelter is - finally - normalizing. Non-discretionary inflation - things like insurance and medical costs - are posed to be a major remaining source of "stickiness". In his speeches and testimony in the past week, #Powell signposted that April is when started counting inflation figures as getting better. That would make Thursday’s data the third month of “better” data and the second month of “good” data. Powell’s testimony suggests they’re looking for three good reports before cutting. We believe this means they'll want to see one more constructive data point in each category to confirm their confidence in cutting rates. That takes July off the table but makes September very much live.  Initial #Fed rate cuts tend to be "relief" moments for the market, until the reason for those rate cuts - a slowing economy - come to bear. For investors that can be tactical, we believe that the #equity market rally can continue until more pronounced signs of slowdown occur. We watch for a durable rise in jobless claims or a deterioration in earnings expectations as key market signals - neither of these are flashing red today. We also believe that the first Fed rate cut will be a pivotal signal for money sitting on the sidelines. Cash rates move lower (meaning a lower total return from money market funds), the opportunity shot clock to lock in higher rates starts dissolving, and, over time, the yield curve normalizes, reducing the risk of moving further out on the curve.   We think the first of those factors is most important for investors today. As our research has shown, the best time for investors to move is 2-3 months before a Fed pivot, so investors can capture conditions before the market catches up to the rising likelihood of policy change. The time to move may be near...

July’s employment report from the Bureau of Labor Statistics should give the Fed the exclamation point they have been looking for to show that the economy is slowing enough to warrant a rate cut. Market expectations have shifted firmly to a 50-bps interest rate cut at the Fed’s meeting in mid-September, rather than a 25-bps cut which had been the prevailing view prior to this report. Now handwringing will ratchet higher as to whether the Fed is in the process of successfully orchestrating a soft landing or if they have waited too long to shift their monetary policy stance. Job growth slowed more than expected in July and gains in May and June were revised lower. The unemployment rate increased 20 bps during the month and is up 60 bps over the past six months – unemployment rate changes of 50 bps or more over a six-month period have typically corresponded with recessions (see accompanying chart). Wage growth also appears to have slowed over the past couple of months. Even allowing for some volatility in the monthly data, the three-month moving average in employment growth and unemployment show an undeniable softening. Unemployment insurance claims add further evidence to the slowing trend. Initial unemployment claims have ticked higher over the past three weeks and continuing claims are at their highest level since the fourth quarter of 2021. It is difficult to call current labor market conditions weak with the unemployment rate still at 4.3%, but job gains appear increasingly lackluster across major employment sectors and the loss of momentum is undeniable. Stock and bond market participants are reacting in a way that suggests increased recession fears. Earnings reports have only fueled these concerns. The 10-year Treasury rate has fallen materially below 4.0%. Mortgage rates have also been ticking lower, which is good news for prospective home buyers. Rate cuts appear to be on the way, but macroeconomic conditions are increasingly precarious and the Fed’s September meeting may start to feel like a lifetime away if more bad news unfolds. The week ahead is not a busy one from an economic news perspective, but ISM services, mortgage delinquency, Fed Senior Loan Office Survey, and jobless claims, among others will be interesting to watch for additional information on the economy’s trajectory. What indicators are you watching for?

The US Federal Reserve cut interest rates by 50 basis points, bringing the benchmark rate down to 4.75%-5%. This marks the first rate cut of this size in over a decade, signaling a shift in focus from fighting inflation to supporting economic growth. 📊 Key Insights: • Inflation is under control, having eased from a high of 9.1% in 2022 to 2.5% in August 2024. The Fed’s decision highlights confidence that inflation will continue to trend toward its 2% target. • However, the pace of rate cuts (50 bps now, with potential for more) signals caution, as the Fed looks to balance economic support with inflation management. ⚠️ Recession Fears Still Loom: • While a 50 bps cut might seem like a boost, it reflects concerns about the cooling labor market and slowing growth. Unemployment has risen to 4%, and job gains are softening. • The yield curve steepening after the cut is a classic indicator of recession risk. Though the Fed remains optimistic, there’s growing uncertainty about the long-term growth outlook, making this cut a double-edged sword. 🇮🇳 Impact on Indian Markets: • The weakening US dollar and dovish Fed stance could support capital inflows into Indian equities as global investors seek higher returns. • Rupee strengthened, reflecting confidence in India’s relative stability. However, India’s export sector could face challenges if the rupee appreciates further. • Indian central bank’s next moves will be key, as the RBI may take a more cautious approach in light of global easing trends. 🔍 What Lies Ahead? The Fed’s data-driven approach means future cuts are likely, but the broader concern is whether these cuts will be enough to sustain growth without triggering further economic turbulence. #USFed #RateCut #RecessionFears #GlobalEconomy #IndianMarkets #Inflation #Investment #RBI

The Fed Cut Rates, But Can It Cut Unemployment? The global economy is at a crossroads again. After months of caution and mixed market signals, the U.S. Federal Reserve finally pulled the lever cutting interest rates by 0.25%. This marks not just a monetary shift, but a strategic one: from fighting inflation to stabilizing employment and restoring growth momentum. Yet beneath the headlines, a deeper story unfolds. While cheaper borrowing costs promise relief for businesses and households, the question remains Will this new liquidity translate into real job creation, or merely accelerate automation and cost-cutting? In this edition, we unpack the implications of the Fed’s decision: how it affects corporate cash flow, global capital markets, the ongoing U.S. government shutdown, and the widening gap between AI-driven prosperity and human-centered employment. Because in today’s economy, lower rates alone don’t guarantee higher opportunity it’s about where the money flows, and who it reaches.

As expected the Bank kept interest rates at 4.75% today, but it was a “dovish” hold. That means there’s still a good chance of rates cuts in the new year. Given the recent economic data, a hold was almost certain. But the MPC was clearly sending a message to financial markets that they had gone too far in only pricing in two rate cuts next year. Indeed, three members voted for a cut vs expectations of just one. In addition, the forward guidance of “A gradual approach to removing monetary policy restraint remained appropriate” was unchanged, indicating that the MPC doesn’t think the underlying issues impacting the outlook for interest rates have changed. Finally, there was a somewhat dismissive line about the recent strength of wage growth, suggesting the MPC is relatively relaxed about the stronger wage growth data. Markets got the message with the chances of a February rate cut jumping from 50/50 before the meeting to over 70% now. The key uncertainty remains how firms will respond to the rise in NICs in the budget. If firms pass costs on by more than expected then inflation will rise further, but if firms offset the costs through lower pay growth, then that might give the Bank room for further cuts. More broadly, the MPC is once again dealing with the dreaded trade-off between weak growth and rising inflation. Given the recent period of high inflation and that inflation expectations have been ticking back up recently, we think the MPC will be less willing than usual to look through any temporary increases in inflation, that points to a slow and gradual approach to rate cuts. We still expect four cut next year, but clearly the risks are heavily weighted towards fewer cuts. #RSMUK #RealEconomy #InterestRates #MPC #Economics

The Federal Reserve’s half-point cut in the Federal Funds Rates signals both the end of its fight against high inflation and a renewed focus on supporting the labor market. Chair Powell’s speech in Jackson Hole last month previewed this shift toward protecting the labor market, and those words are now turning into action. Powell and other policymakers openly acknowledged the risks to the labor market are growing, with 12 participants indicating unemployment risks were increasing, up from only 4 in June. The median projection for the unemployment rate for the end of this year and 2025 increased to 4.4%, from 4% and 4.2% earlier this year, signaling the Fed expects the labor market to soften further. With inflation trending toward 2 percent, a smooth landing can happen if actual data comes in as projected. But whether or not the pilot lands the plane skillfully depends on whether the pullback in interest rates is large enough and quick enough. The descent is going well so far, but the plane is not yet on the ground.

Fed Rate Cut Impact When the Federal Reserve (Fed) cuts interest rates, the stock market typically experiences several notable effects. While the specific outcomes can vary based on the broader economic context and market conditions, the general trends are often observed as follows: Immediate Market Reactions 1. Positive Sentiment: A rate cut usually signals the Fed's intention to stimulate economic activity, which can boost investor confidence. 2. Increased Valuations: Lower interest rates mean that the present value of future earnings increases, as the discount rate applied in valuation models decreases. 3. Sectoral Impact: Financials: Banks and other financial institutions may face pressure on their profit margins. Real Estate: Lower rates can boost the real estate sector by making mortgages cheaper, thereby increasing housing demand and benefiting related stocks. Technology: Tech companies, often characterised by high growth potential and significant future earnings, tend to benefit. Medium to Long-Term Effects 1. Economic Growth: Sustained rate cuts aim to spur economic growth by making borrowing cheaper for consumers and businesses. 2. Inflation Expectations: If rate cuts succeed in boosting demand, inflation may rise. 3. Corporate Debt: Lower interest rates make it cheaper for companies to refinance existing debt and issue new debt. Historical Context and Examples 1. 2008 Financial Crisis: During the financial crisis, the Fed cut rates aggressively to near-zero levels. Initially, the stock market continued to decline due to severe economic uncertainty. However, as the economy began to stabilise, lower rates supported a significant recovery in stock prices, culminating in a prolonged bull market. 2. COVID-19 Pandemic: In early 2020, the Fed cut rates to near-zero in response to the economic impact of the COVID-19 pandemic. This action, combined with other stimulus measures, helped to stabilise the stock market after an initial sharp decline, leading to a robust recovery and new market highs later in the year. Caveats and Considerations 1. Market Expectations: The impact of a rate cut can be muted if it is already widely anticipated by the market. 2. Economic Context: If a rate cut is perceived as a response to deteriorating economic conditions, the positive impact on stocks might be limited. 3. Long-Term Rates: While the Fed controls short-term interest rates, long-term rates are influenced by market forces. In conclusion, while Fed rate cuts generally have a favourable impact on the stock market, the extent and duration of this impact depend on various factors, including investor sentiment, economic conditions, and the broader monetary policy environment. Investors should consider these dynamics and remain vigilant to the broader economic signals accompanying rate cuts. References Federal Reserve Historical Interest Rates Impact of Federal Reserve Rate Changes on Stock Market Economic Insights from Fed Actions