The focus in the coming week is squarely on the Federal Reserve, as Wall Street anticipates a significant decision on the Fed rate cut at the upcoming September 17-18 meeting. Investors and analysts are keeping a close watch on how much the central bank will reduce borrowing costs and what pace the Fed will follow in future rate cuts.
Key Takeaways
Fed Rate Cut Speculation: The markets are eagerly awaiting the Fed’s decision on whether to cut rates by 25 or 50 basis points, with equal chances of either happening.
S&P 500 Near Record High: Despite market fluctuations, the S&P 500 is just 1% below its July record, driven by hopes of a significant Fed rate cut.
Economic Projections in Focus: Investors will closely watch the Fed’s new economic projections, with some analysts calling for aggressive rate cuts to address the growing gap between bond yields and the Fed funds rate.
Impact on Stock Market: Rising yields may pressure stock valuations if the Fed signals less easing than the market expects, potentially affecting investor confidence in the coming weeks.
Fed Rate Cut: Markets Eager for Clarity
With the Fed rate cut dominating market discussions, the S&P 500 has risen close to its record high, currently sitting just 1% shy of its July peak. This comes despite recent market volatility triggered by economic concerns and shifting bets on the size of the rate cut.
As of Friday, traders were split on whether the Federal Reserve would opt for a 25-basis-point or a 50-basis-point rate reduction. According to CME FedWatch data, there’s an almost equal chance of either cut being implemented. This uncertainty is largely due to a weakened labor market and softer inflation data, prompting debate over whether the Fed will act aggressively or take a more measured approach.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, highlighted the market’s need for the Fed to exude confidence while also signaling that economic growth is slowing but not collapsing. He noted, "The market wants to see the Fed portray a level of confidence that growth is slowing but not falling off a cliff."
Stock Market Reactions and Economic Projections
The upcoming Fed meeting also brings with it new economic projections and a clearer view of the central bank's interest rate outlook. Investors are currently pricing in 115 basis points worth of rate cuts by the end of 2024, a far cry from the Fed's June forecast, which only accounted for a 25-basis-point cut for the year.
Walter Todd, chief investment officer at Greenwood Capital, has argued that the Fed should implement a 50-basis-point cut. He pointed to the growing gap between the 2-year Treasury yield, which stands at around 3.6%, and the current Fed funds rate of 5.25%-5.5%. Todd noted, "They are late in starting this cutting cycle, and they need to catch up."
However, if the Fed indicates less easing than expected, there could be a sharp adjustment in bond markets, pushing yields higher. Mike Mullaney, director of global markets research at Boston Partners, cautioned that rising yields could put pressure on stock valuations, which are already stretched. He remarked, "I find it implausible that you're going to get P/E multiple expansion between now and year-end in a rising yield environment."
Employment Market in Focus as Inflation Moderates
As inflationary pressures ease, attention has turned to the labor market. Recent job reports have indicated weaker-than-expected employment growth, and the unemployment rate rose to 4.2% in August—an uptick that the Fed didn’t expect to occur until 2025. According to Oscar Munoz, chief US macro strategist at TD Securities, this could prompt the Fed to act more aggressively on rate cuts to prevent further economic slowdown.
"If the (forecast) disappoints, meaning they turn more conservative and they don't ease as much, I think the market might not take it well," Munoz warned.
What to Expect Moving Forward
As the week unfolds, the focus will remain on how the Federal Reserve positions itself on the path to rate cuts. Whether the central bank takes a cautious, measured approach or opts for a more aggressive reduction in borrowing costs, the decision will have a lasting impact on the markets. Investors will be watching closely to see how the Fed addresses the ongoing economic challenges, from inflation moderation to a cooling labor market.
The upcoming rate decision will likely set the tone for the S&P 500’s performance as it inches closer to its record high. If the Fed rate cut aligns with market expectations, it could provide the boost needed to propel stocks to new heights. However, any surprises or conservative forecasts from the Fed could temper investor enthusiasm and lead to volatility in the days ahead.
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