The Fed Finally Delivers on Promise to Slash Interest Rates

On Wednesday, the Federal Reserve finally, finally, finally, finally, finally slashed interest rates, delivering a half-point cut — the high end of consensus expectations. 

The bold maneuver marks the beginning of the end of the “higher-for-longer” era as the Fed moves to buttress the labor market and soft-land the economy. 

Half-Point Measures

A rate cut was all but certain, with only one question remaining before the Wednesday meeting: How big, a quarter-point or a half-point? Most analysts predicted the former, in line with the steady and cautious approach the central bank has taken thus far; in July, the Fed opted to hold rates constant, in contrast to more aggressive central banks the world over, and despite much public backlash and a labor market that was just starting to show some cracks. By choosing the half-point cut, Jerome Powell and friends can now have it both ways. In remarks after the Fed meeting, Powell said prior patience “has really paid dividends” in proving that the 2% inflation target was both achievable and sustainable, and urged critics to take the bigger cut “as a sign of our commitment not to get behind.” 

Wall Street, it seems, took it as a sign of optimism that a recession will be avoided. After an initial sugar rush, markets mostly settled:

• The S&P 500 jumped as much as 1% on the news, and even briefly surpassed its intraday all-time high; the index finished down 0.29%. Smaller-cap companies benefited the most, continuing the trend of a rotation out of Big Tech — a sign of broader market optimism — with the Russell 2000 Index spiking more than 2% before finishing up nearly 0.04% at close.
• Treasury yields, meanwhile, continued to climb ever so slightly after rising a smidge ahead of the announcement: The two-year treasury yield rose two basis points to 3.6%.

What’s Next? Unsurprisingly, inflation hawks are not too happy. “Clearly they have taken their eye off [the inflation] ball and although inflation is much lower now than the peak we saw in 2022, igniting a stock market rally and goosing a growing economy with lower rates risks letting inflation come roaring back before this bull market ends,” Chris Zaccarelli of Independent Advisor Alliance told Bloomberg in a roundtable. What comes next? The Fed provided plenty of clues: Updated policymaker projections showed a median estimate anticipating a total of 50 basis points of cuts by year-end, most likely split between November and December meetings, and another 100 basis points of cuts next year, though the ever-measured Powell emphasized these were mere forecasts. “We’re always going to try to do what we think is the right thing for the economy at that time. That’s what we’ll do, and that’s what we did today,” the Fed chairman said.