Understanding the Fed's rate cut: Immediate impact vs. long-term outlook

From Michael Hans, Citizens Private Wealth Chief Investment Officer

On September 18, 2024, the Federal Reserve concluded the most widely anticipated meeting in quite some time, announcing a half-percent reduction in the federal funds rate. The committee is also projecting an additional 50 basis points of rate cuts by year end, with further easing continuing throughout 2025 as the Fed targets a neutral policy rate, around 3% over time. 

Chair Powell's commentary

For much of the last two years, the Fed's sole focus has been on managing inflation. Only recently has it begun to shift its attention to the labor market. During the Fed's press conference, Federal Reserve Chair Jerome Powell emphasized that risks across the economy are now fairly neutral, which necessitates a recalibration in the Fed's stance. While hiring across the labor market remains steady, the Fed wants to ensure this progress doesn't deteriorate into higher layoffs and unemployment. Chair Powell credited the Fed's patience and maintenance of this restrictive policy, as a core reason in bringing inflation back toward its goal of 2%, which the committee now believes is on a sustainable path toward that level. 

Importantly, Powell noted that the Fed is by no means on a preset course and will make decisions at every meeting in accordance with how the economy progresses. Overall, the 50 basis point cut is not an indication of the Fed's concern being behind the curve, but rather a way to maintain control of policy and stability in the economy. 

Market reaction

For the last several weeks, markets had been anticipating such a rate reduction; however, the magnitude of cuts and the messaging was debated. As is typically the case, the market action was extremely quiet up until the decision, with volatility picking up throughout the balance of the day.   

As of September 19, equity markets are rallying sharply after digesting the Fed's message overnight. Bonds, on the other hand, are exhibiting similar price action to yesterday, with rates slightly lower at the front end of the curve and modestly elevated out along the curve.

All in all, the hype leading into the Fed’s decision was palpable — and the Fed’s messaging delivered no material surprises or concerns, and is inferred to be supportive of risk assets at this point.

Outlook and implications

The actions from the Fed will have a limited impact on the economy. Markets react quickly to new information and will settle in the coming days. The focus will immediately return to incoming data, geopolitical uncertainty and the potential volatility surrounding the upcoming election. It is too early to determine if the Fed’s decision will change the trajectory of markets or the economy on a long-term basis. 

Portfolio maintenance

Now, more than ever, is an important time to review portfolios and asset allocation exposures in light of your long-term objectives and goals. Diversified portfolios have performed extremely well over the last two years, and equities across nearly all segments are at, or near, all-time highs while credit spreads remain narrow. This presents interesting opportunities across asset classes and styles.

Your wealth advisor¹ is prepared to help you navigate through the ever-changing landscape over what will undoubtedly be an eventful balance of the year.