Why Wall Street Is in for Big Rate Cuts in Q4

Bulls are back and investors are chasing a higher market.

Last week I wrote about why a 50 basis point interest rate cut was a mistake, as experts told me the central bank’s bold move would spell doom and gloom for the economy and risk triggering a market sell-off.

Yet, a week later, Wall Street appears to be on board with a major rate cut, as stocks soar to record highs.

And traders are betting the central bank will ease its aggressive pace. According to the CME Group’s FedWatch tool, traders are pricing in an additional 75 basis points while the Fed signals another 50 basis points of cuts at its two remaining 2024 meetings.

Experts tell me it’s cooling inflation, not the risk of a recession, that would give the Fed the green light for another big cut. Prices fell to a three-year low in August.

“If so [inflation] continues to ease, and interest rates should be cut accordingly,” explained Kathy Postjanczyk, chief economist at Nationwide Mutual.

“The Fed Reserve should go 50 basis points next [meeting],” Bostjancic added. “They are far from neutral, so a 50 basis point drop is not necessarily a sign that the economy is slowing down. It is an acknowledgment that the policy is too restrictive.

The Federal Reserve is set to release its next interest rate decision on November 7, and will have another chance to cut interest rates at its December meeting.

If last week is a guide, a drastic cut could be a catalyst for the market. Powell’s insistence that the Fed’s move should be seen as “a sign of our commitment not to back down” was enough to boost investor confidence. The S&P 500 (^GSPC) and the Dow Jones industrial average hit their 39th record high of the year. ^DJI) rose above 42,000.

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“The Fed was able to cut 50 basis points, not because it had to, but because it could, and I think that’s the most important difference,” Matt Orton, chief market strategist at Raymond James, told Yahoo Finance’s ‘Morning Brief.’ ‘

“It supports more investment, it supports more capex, and that’s what’s behind a lot of the economic downturn.”

John Hancock’s Emily Rowland told me that the increased hope of a soft landing is driving “a lot of optimism across the markets.”

“Risk assets really celebrate the idea that the Fed can prevent a hard landing and do it proactively before we see more weakness in the labor market,” Rowland said.

Brian Belsky, chief investment strategist at BMO Capital Markets, raised his year-end S&P 500 price target to the Street at 6,100, citing historical performance patterns that “suggest a stronger-than-normal 4Q in the market and particularly the transition to Fed easing.”

Two key jobs reports will help guide the Fed on the size of its next rate cut. In a note to clients on Friday, Michael Pearce of Oxford Economics warned that further softening in the labor market could prompt the Fed to cut 50 basis points sooner.

“Given the shift toward an easing bias from Federal Reserve officials, any negative surprises in labor market data could push them to deliver another 50bp cut in November,” Pearce wrote.

Sean Smith He is a presenter at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, links, fan situations or something else? Email [email protected].

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