The U.S. stock market is preparing for a period of volatility as the Federal Reserve signals an imminent reduction in interest rates. Investors are keenly watching upcoming economic data to gauge the feasibility of the “soft landing” scenario that has supported U.S. stocks throughout the year.
What Happened: Federal Reserve Chair Jerome Powell announced last Friday that it’s time to start lowering interest rates. The rate-cutting process is likely to begin next month with a 25 basis-point cut at the Fed’s monetary policy meeting on Sep. 17-18.
Despite the S&P 500 gaining 18% this year, market participants are seeking continued evidence of the economy’s smooth transition to a soft landing, where growth remains strong while inflation cools, Reuters reported on Monday.
However, if the Fed’s message indicates concern about the economy, the excitement about the cutting cycle may need to be reassessed. Historically, stocks have performed better when rate cuts occur against a backdrop of resilient growth rather than during a sharp economic downturn.
Andre Bakhos, managing member at Ingenium Analytics LLC, said, “The longer-term trends in stocks are rock-solid and any weakness is an opportunity to add exposure.” However, he warned of potential short-term volatility, stating, “we’re going to get … choppy, erratic, volatile moves because no one really knows what happens now that he (Powell) has shown his hand.”
Why It Matters: The Federal Reserve’s shift from a hawkish tone to signaling a rate cut has been prompted by a string of weak data and continued improvement in pricing pressure. However, historical data suggests that the market may not fare well in the months following a rate cut.
Furthermore, Drew Matus, MetLife Investment Management's chief market strategist, has urged Powell to separate the Fed's actions from the stock market. He argued that the Fed's decisions should not be influenced by the unemployment rate exceeding 4%, or by the easing of financial conditions.
Price Action: On Monday, at the time of writing, SPDR S&P 500 ETF Trust SPY was trading 0.17% higher while Invesco QQQ Trust, Series 1 QQQ was down by 0.26%, according to Benzinga Pro.
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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari
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