We have discussed in our last two posts the rate cut last week from the Fed. Here is another perspective from JP Morgan, one of the Portfolio Strategists we utilize for client accounts, found in their Weekly Market Recap…
Despite strong economic indicators leading up to the FOMC meeting – including the Aug. retail sales report that beat expectations – the Fed chose to go big.
Last week, the Fed kicked off its much-anticipated easing cycle with a bold move. It cut the policy rate by a jumbo .50%, surprising many who expected amore regular .25% cut seen at the start of a soft-landing easing cycle. This move has left investors wondering about the rationale behind it and its implications for markets and the economy.
Despite strong economic indicators leading up to the FOMC meeting – including the Aug. retail sales report that beat expectations – the Fed chose to go big. Historically, the Fed has begun its easing cycle with an outsized cut when the economy faced an imminent downturn. Such a downturn is typically characterized by a sharp deterioration in real retail sales momentum, as seen in Jan. ’01 and Sep. ’07. However, with current sales momentum still solid, the outsized cut was atypical. In its defense, the Fed characterized this move as a “recalibration” of rates, emphasizing that it does not set the pace of future cuts.
Investors were worried that a .50% reduction, in the absence of apparent economic concerns, may signal hidden economic weakness. However, Chair Powell’s repeated reassurances that the economy is still strong and that the jumbo cut is aimed to keep it that way seem to have eased those concerns. While the dot plot suggests future cuts will likely be gradual, investors looking to diversify out of cash will find their window of opportunity shortened by this cut.
