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The Fed Delivered a Larger-than-Usual Interest Rate Cut
On Wednesday, in a widely anticipated move, the Federal Reserve announced an outsized 50 basis point interest rate cut, reflecting a confidence in its ability to manage inflation and rising concerns about the health of the labour market, with the goal of averting a potential recession.
The Fed signalled the beginning of a series of rate reductions aimed at supporting economic growth and by next summer, the projections are for additional 150 basis points cuts.
While a rate cut was widely expected, the debate centred around its size in the lead-up to Wednesday’s announcement. Market speculation suggested that a larger cut could reflect the Federal Reserve’s increasing concerns about the economy’s strength and future outlook.
Inflation and Employment Balance
In its statement, the Federal Open Market Committee (FOMC) emphasized increased confidence that inflation is moving toward the 2% target. Policymakers indicated that risks to both inflation and employment objectives are now more balanced.
Despite inflation remaining “somewhat elevated,” the FOMC highlighted that the decision to lower rates by a larger 50 basis points was made in response to the progress on inflation and the rapidly slowing employment. The Fed also reaffirmed its readiness to adjust monetary policy if risks emerge that could obstruct its dual mandate – maintaining stable prices and maximum employment.
Future Rate Projections
Enthusiasm for future rate cuts was tempered by Fed Chair Jerome Powell’s remarks that the central bank does not intend to return to the era of ultra-low interest rates seen during the COVID-19 pandemic. While the Fed had previously slashed rates to near zero to mitigate the economic fallout, Powell indicated that the neutral rate going forward would be significantly higher than before.
The Federal Reserve projects further reductions in its benchmark interest rate, with an additional 50 basis points of cut expected by the end of 2024, followed by 100 basis points easing in 2025, and another 50 basis points cut in 2026, bringing the rate to a range of 2.75%-3.00%.
This endpoint represents a slight upward revision to the longer-term federal funds rate from 2.8% to 2.9%, a neutral stance that neither stimulates nor constrains economic activity.
Source: Federal Reserve Board
Economic Projections
Inflation, currently 0.50% above the Fed’s 2% target, is forecasted to decline to 2.3% by the end of 2024 and further to 2.1% by the end of 2025. The unemployment rate is expected to rise slightly to 4.4% by the end of the year, with economic growth projected at 2.1% for 2024 and 2.0% for 2025 – unchanged from previous forecasts.
Market Reaction to the Jumbo Rate Cut was Muted
US equity markets initially cheered the aggressive interest rate cut and jumped on the news but have erased all of the gains throughout the trading session. Perhaps the market reaction was muted because the stock market has rallied strongly ahead of the Fed’s decision.
Nonetheless, the Fed’s commitment to avoid a hard landing and its willingness to adjust drastically the policy stance (if needed) in order to achieve long-term economic stability, could trigger a stock market rally to new record highs in the months ahead.
Conclusion
The Fed’s aggressive rate cut aims to prevent a recession. While the central bank seeks to stabilize the economy, the labour market remains a concern. If growth weakens further, the Fed could cut rates even lower than the current neutral projections, given that a 3% policy rate is not considered stimulative for the economy.
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Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
