The Federal Reserve’s half-percentage point interest rate cut could have rattled markets if it had exacerbated investor fears that the central bank was preparing for an economic slowdown.
Instead, Fed Chairman Powell appears to have convinced investors that the central bank is cutting rates to keep the economy going, not save it. Stocks rose Thursday after Powell’s news conference following the rate-cutting decision.
“Chair Powell had one task at his post-FOMC press conference today: convince markets that a 50 basis point cut was consistent with thoughtful policy adjustment and not a sign that the Fed is worried about being behind the curve,” DataTrek co-founder Nicholas Colas wrote in a note to clients Wednesday evening. “He accomplished that goal… This is consistent with past mid-cycle markets where stocks can continue to rally.”
Investors had increasingly been hoping for a soft landing, in which the Fed’s aggressive tightening cycle ended with inflation falling back to the 2% target without a significant slowdown in the economy. On Wednesday, Chairman Powell reiterated that such a scenario remains in place.
Powell noted that the U.S. economy is “in good shape” and noted that risks of a further cooling in the labor market have increased, but the Fed is cutting with that in mind.
“The labor market is in really strong shape,” he said. “And our intention with the action we’re taking today is to keep it that way.”
For Colas, the comments do little to change the market narrative.
“The Fed’s decision doesn’t really change the current market situation much,” Colas wrote. “We know rates are coming down. We know the U.S. economy is in reasonably good shape. We know the labor market is cooling, but it’s not crashing yet. While the Fed may have been a bit clumsy in how it conditioned markets to expect today’s decision, that’s all behind us now.”
The day after Chairman Powell’s press conference, the S&P 500 (^GSPC) and the Dow Jones Industrial Average (^DJI) hit new all-time highs, while the Nasdaq Composite (^IXIC) rose more than 2%.
Markets are also showing similar price dynamics as usual, with major tech stocks leading the gains on Wednesday. Nvidia (NVDA) rose more than 4% on Thursday, while Apple (AAPL) and Meta (META) both gained more than 3%. The Information Technology sector (XLK) as a whole rose more than 3.3%, outperforming the S&P 500’s 1.8% gain.
Citi U.S. equity strategist Scott Chronert on Thursday described the rotation into large-cap technology companies as “a recovery move” in a section of the market that is likely to benefit from interest rate cuts but had not led the rally since the S&P 500’s last record close on July 16.
Chronert noted that further deterioration in the labor market remains a key risk to the current rebound, as it could imply a recession. This could still create some instability in business activity if economic data surprises on the downside.
“We’re going to have to keep sailing (if this is a) soft landing rather than, gosh, there’s still some lingering risk of a hard landing,” Chronert told Yahoo Finance.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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