Fed kicks off rate-cutting cycle with a bang – 5 things to know

Some weeks are more consequential than others in shaping the market narrative, and the week of September 15th was one of them. The Fed delivered on what markets have been hoping for and anxiously anticipating over the past two years. Interest rates were cut by a larger-than-typical 0.5%, or 50 basis points, bringing it to a new range of 4.75% to 5%. This signals a critical turning point in the monetary-policy cycle. In response, stocks set new record highs, and the S&P 500 extended its year-date gains to near 20%, as investors embraced and applauded the move. We offer five key takes on what last week’s announcement means for the economy and markets.

Key Takeaways

• The Fed lowered its policy rate last week for the first time in four years. The larger-than-typical 0.5% cut signals a critical turning point in the monetary-policy cycle and a commitment to not fall behind the curve.
• The Fed’s proactive approach increases the likelihood of soft landing, as the
  projected string of rate cuts will lower borrowing costs for consumers and businesses over time, helping growth reaccelerate in 2025.
• The start of a rate-cutting cycle that coincides with no recession has historically led to strong forward equity returns. However, because valuations are currently elevated relative to history, we think the upside will be more modest than previous
  soft-landing cycles.
• Cyclical, mid-cap and high-quality dividend-paying stocks may start to close the
  gap with mega-cap tech. Bonds will continue to benefit from lower rates over time, and investors should pay attention to the reinvestment risk of having an oversized allocation to cash investments.

The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The Fed is trying to ease interest rates to keep the economy from entering a recession, and they’re currently forecasting another half percentage cut by the end of this year, and an additional one percentage cut in 2025.
It’s important to note that mortgage rates may not directly follow the Fed Funds Rate or move in similar increments, but if the overall interest rates are moving lower, it’s typically a good sign for Mortgage Rates.

Contributer: Angelo Kourkafas is responsible for analyzing market conditions, assessing economic trends and developing portfolio strategies and recommendations that help investors work toward their long-term financial goals. He is a contributor to Edward Jones Market Insights and has been featured in The Wall Street Journal, CNBC, FORTUNE magazine, Marketwatch, U.S. News & World Report, The Observer and the Financial Post.