Powell's Hawkish Tone Tempers Market Excitement After Historic 50-Basis-Point Interest Rate Cut, Economist Sees 'Welcome News For Credit-Sensitive Sectors'

Wall Street reacted with unease to Federal Reserve Chair Jerome Powell‘s remarks following a landmark decision to cut the federal funds rate by 50 basis points, bringing it down to a target range of 4.75% to 5%.

The Federal Reserve’s highly anticipated dot plot, which outlines each policymaker’s rate path preference, indicated that policymakers anticipate further easing ahead. The dot plot signaled that the Fed is likely to cut rates by a quarter percentage point at each of the next two decisions. Looking further ahead, it suggests an additional rate reduction of at least another percentage point in 2025.

Despite the initial market euphoria following the 50-basis-point rate cut, Powell’s cautious remarks on the future rate path have injected uncertainty into the markets.

See Also: Interest Rates In Free-Fall – What It Means For Mortgages, Credit Cards And Your Wallet As The Federal Reserve Springs Into Action For First Time In 4 Years

Market Response To Rate Cut, Powell’s Remarks

Initially, the S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, surged to record highs. Gold prices, represented by the SPDR Gold Trust GLD, also hit all-time highs as the U.S. dollar weakened.

Interest-rate sensitive stocks were the largest gainers between 2 p.m. and 2:35 p.m. ET, with small caps outperforming large-cap counterparts.

Yet, Powell’s cautionary comments during the press conference caused a reversal in market sentiment.

Here’s how major asset classes closed on the Fed’s decision day:

• The U.S. dollar, which many believed would plummet in a 50-basis-point cut scenario, instead recouped its losses and rallied to weekly highs. The Invesco DB USD Index Bullish Fund ETF UUP closed 0.1% higher.
• U.S. large-cap indices all ended the day in the red, paring back gains made immediately after the rate decision. The S&P 500 finished 0.3% lower, while the Nasdaq 100, tracked by the Invesco QQQ Trust QQQ, declined by 0.4%.
• Small caps managed to close unchanged for the day, but they still gave back all their post-rate-cut gains.
• Sector-wise, the Energy Select Sector SPDR Fund XLE was the only sector to close in positive territory, up 0.2%.
• The worst performer was the Technology Select Sector SPDR Fund XLK, which fell 1%.
• Gold dropped 0.4% to $2,555 per ounce, hitting levels last seen on Thursday of the previous week.
• Silver and oil also saw robust declines, closing 2.1% and 1.2% lower, respectively.
• Bitcoin BTC/USD fell 1.1% to $59,717.

Powell’s Caution Stirs Investor Uncertainty

While defending the 50-basis-point rate cut, Powell tempered market enthusiasm, emphasizing that such a cut should not be seen as a new norm. His key statements on Wednesday included:

• “No one should look at today and think this is the new pace.”
• “We can go quicker or slower, or pause, on rate cuts if it is appropriate.”
• “There is nothing in our projections that suggest we are in a rush.”
• “If the economy remains solid and inflation persists, we can dial back policy restraint more slowly.”

These comments signaled a more cautious approach to future rate cuts, disappointing investors who had hoped for a more aggressive easing cycle.

Economist Insights

• Jeffrey Roach, LPL Financial: “We learned from today's Summary of Economic Projections (SEP) that the Fed is interested in getting to a neutral fed funds rate as quickly as possible.”
• John Lynch, Comerica Wealth Management: “The Fed was more aggressive than I expected, since 50 basis point cuts are historically associated with crises. I don't consider 2% GDP, 4.2% unemployment rate, and 15% profit growth forecasts for 2025 as a crisis.”
• Bill Adams, Comerica Bank: “With the Fed pivoting, interest rates will be substantially lower over the next six to twelve months. That is very welcome news for credit-sensitive sectors of the economy like housing, manufacturing, and retailers of cars and other big-ticket consumer products.”
• Chris Zaccarelli, Independent Advisor Alliance: “Lowering interest rates now should allow the market to hit all-time highs again by the end of this year, and more gains for next year.”

Read Next:

• 20 S&P 500 Stocks That Move The Most When The Fed Starts Cutting Interest Rates

Photo courtesy of the Federal Reserve.