Is Powell Snubbing Interest in 2nd Fed Rate Cut?

The rate cut that investors fretted would never come finally arrived last week, which, of course, means it’s time for … fretting about the next cut. 

US markets fell on Tuesday, putting a pin in a record-setting run, after Federal Reserve Chair Jerome Powell gave off a hawkish vibe, insisting the central bank will move cautiously on additional cuts and suggesting that equities are overpriced.

Proceed With Caution

In a speech in Rhode Island, Powell delivered no revelations, but rather a reminder. The Fed remains in a “challenging situation,” caught between managing inflation (which has been above the central bank’s 2% target rate since 2021) and the labor market (which has softened appreciably in recent months).

Even with investors betting there is a 91.9% chance the Fed’s policymaking board lowers rates by at least a quarter-point on Oct. 29, according to the CME FedWatch, Powell’s message was clear: Nothing’s written in permanent ink. “If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation,” the level the Fed has long viewed as stable economic growth, he said. During a Q&A after his remarks, Powell also reiterated another factor that many prominent observers have said for months or longer could eventually catch up with investors, that “equity prices are fairly highly valued.” Central to those concerns is the strength of the AI boom, which has powered this year’s market rally. It was rattled on Tuesday:

• The S&P 500 fell 0.5%, after reaching an intraday high before Powell’s remarks. The tech-heavy Nasdaq fell 1%, with several AI power players down (Nvidia fell 2.8%, Oracle 4.3%, Amazon 3% and Meta 1.3%).
• On Monday, Nvidia pledged to invest up to $100 billion in OpenAI, while OpenAI promised to buy chips from Nvidia. Yes, that’s circular, for those of you keeping score at home. Bespoke Investment Group analysts wrote in a note on Tuesday: “OpenAI is now selling itself off to a supplier in order to fund its investments. Phrased differently, [Nvidia] is purchasing a stake in a customer in order to assure future revenue. You don’t have to be a skeptic about AI technology’s promise in general to see this announcement as a troubling signal about how self-referential the entire space has become.” 

Get Used to It: The S&P 500 is trading at the highest against future earnings since the 2021 post-COVID boom. The most aggressive bears, like Universa’s Mark Spitznagel, forecast a crash. Powell said Monday, for the Fed’s part, officials will “balance both sides of our dual mandate,” suggesting interest-rate cuts will come if growth is at risk. Vanguard analysts wrote last week that the “real” long-term consideration for investors is “how they adapt to a world where structurally higher rates — and the forces behind them — are likely here to stay.”