While Federal Reserve Chair Jerome Powell clearly signaled rate cuts are on the way, he managed to avoid spooking investors. Fed-funds futures traders now see a roughly 1-in-3 change of an outsize 50 basis point, or half a percentage point, rate hike in September, up from 1-in-4 on Thursday.
Stocks are sharply higher, with the Dow Jones Industrial Average just 20 points or so away from its record finish of 41,198.08 set on July 17.
“As expected, Powell gave no firm indication of the size of the cut but made it clear that rates will begin to come down next month. Following Powell’s comments, the equity market rallied, and the dollar weakened, as his dovish tone suggested lower rates on the horizon without triggering panic,” said Carl Ludwigson, managing director at Bel Air Investment Advisors, in emailed comments.
While investors debate prospects of a half-point rate cut, Ludwigson said investors shouldn’t expect the Fed to take extraordinary measures. That’s because Powell “understands that economic actors value gradualism” which will likely steer the Fed toward a series of 25 basis point cuts rather than 50 basis point moves.
“Rate cuts promote growth with a lag, while in the short term, they may create hesitation or fear in the economy depending on how they are delivered,” he wrote. “Powell gave the market just enough dovishness to support the market while avoiding the potential pitfall of inducing fear.”
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