On Wednesday, the US stock market experienced a sharp decline following the Federal Reserve’s announcement of a significant 50 basis point interest rate cut, Fortune reports.
While investors initially responded positively to the news, all three major US stock indices ended the day lower. The Dow Jones Industrial Average fell by 0.25%, the S&P 500 dropped 0.29%, and the tech-heavy Nasdaq Composite declined by 0.31%.
Despite Fed Chair Jerome Powell’s assurance that the rate cut was intended to show confidence in the economy and sustain the labor market’s strength, stocks became volatile, leading to a sell-off by the market’s close.
Several experts have speculated on the reasons behind the market’s negative reaction. Rick Rieder, BlackRock’s CIO of Global Fixed Income, suggested that while the immediate cut was welcomed, the long-term outlook for interest rates did not meet investor expectations. The Fed’s Summary of Economic Projections indicated future cuts of 25 basis points this year and another 100 basis points by 2025. However, investors were expecting a more aggressive rate-cutting path, possibly reflecting concerns over a potential recession.
“The market has priced in a rate path more aligned with recessionary conditions rather than a recalibration of rates to a neutral policy,” Rieder explained.
Thomas Simons, a senior economist at Jefferies, echoed similar sentiments, noting that while the 50 basis point cut was a “dovish surprise,” the long-term rate outlook suggested fewer major cuts ahead, dampening market enthusiasm.
Another theory proposed by experts is that the Fed’s rate cut may be seen as an acknowledgment that it had fallen behind on easing monetary policy. Although Powell denied this during his post-meeting press conference, some analysts, including Robert Minter from abrdn, expressed skepticism. Minter argued that the size of the cut indicated the Fed had recognized it needed to act sooner.
Robert Frick, corporate economist at Navy Federal Credit Union, pointed out that recent revisions to labor market data, which showed the U.S. employed 818,000 fewer people than initially reported, could have led the Fed to reconsider its previous stance.
“The half-point cut is an admission that the Fed is behind the curve,” Frick said.
He, however, added that it was not a sign of panic.
Despite these concerns, Powell maintained a positive outlook on the economy, asserting that inflation was under control and the labor market remained strong. He dismissed any signs of an impending recession.
“I don’t see anything in the economy right now that suggests the likelihood of a downturn is elevated,” he said.
Not all experts were critical of the Fed’s decision. Jay Hatfield, CEO of Infrastructure Capital Advisors, praised Powell’s move, calling it an aggressive action aimed at staying ahead of potential economic risks.
The volatility in the stock market following the announcement is not unusual, according to Steven Wieting, interim chief investment officer at Citi Wealth. He noted that markets often experience short-term turbulence as investors process the broader implications of Federal Reserve decisions.
Powell’s comments about the future trajectory of interest rates may have also contributed to the market sell-off. He indicated that the neutral rate—the level at which monetary policy is neither stimulating nor constraining the economy—is likely to remain higher than pre-pandemic levels, a departure from the near-zero rates investors had grown accustomed to.
