Wall Street’s New Era Off to Rocky Start Despite Big Fed Cut

Lu Wang, Jessica Menton and Michael Mackenzie
5 min read

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(Bloomberg) -- Jerome Powell delivered exactly what traders up and down Wall Street had long hoped for: A big interest-rate cut that would justify this year’s steep rally in stocks and bonds as the era of tight monetary policy finally began to reverse.

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Equities, especially those of economically sensitive companies, briefly surged, driving the S&P 500 up as much as 1%. Ditto for bonds, while the prospect of easy money ahead initially pushed up speculative assets like crypto.

Yet by the time the trading day ended, the gains fizzled as a more sobering economic and market reality sunk in. Even with the half-point rate cut — the kind of aggressive move usually reserved for a recession or crisis — and more on the way, the investment backdrop was no more clear cut than it was before.

Stock prices are already near record highs. The economy is losing a little steam. And it’s no sure thing that the rock-bottom rates swept away by post-pandemic inflation will come back anytime soon.

While equities gained some momentum on Thursday, and Treasuries inched higher, every major asset was down Wednesday. While the scale of the declines were minor, a concerted pullback like that hadn’t followed a Fed policy decision since June 2021.

Of particular concern to traders were comments from Powell that coincided with the reversal in the stock and bond markets: that nobody should expect the Fed to make a habit of half-point reductions in the future, and that the neutral level of interest rates is likely higher than it was before the pandemic.

“The important point here is that there’s the action, in the 50 basis points, and the expectation in what was priced in,” said Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., on Bloomberg Television. “This is a little bit disappointing relative to what’s been built up in bond expectations.”

In the aftermath, economists and traders moved to adjust their forecasts and wagers to account for the Fed’s new narrative. Goldman Sachs Group Inc. projected a longer string of consecutive cuts, while JPMorgan Chase & Co.’s economists reiterated their call for another half-point reduction in November even as they pointed to jobs data as key to their view.

Powell was upbeat about the economy and waved off recession fears, tempering the market’s expectations for where it’s heading. During his press conference, he said the central bank is confident “strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.” At the same time, he cautioned against assuming the half-point move set a pace that policymakers would continue — underscoring that everything would hinge on how the data come in.

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