Fed Rate Cut Imminent: How Will the Market React?

Stocks at 'Goldilocks Peak': Can It Last?

The S&P 500 made yet another all-time high on Monday, driven by the fully digested expectation that the Federal Reserve will deliver a 25-basis-point rate cut on Thursday. However, it's often said that the market tends to "buy the rumor, sell the news," meaning investors might rush to lock in profits once Fed Chair Jerome Powell delivers the anticipated rate cut. The prevailing expectation is that the Fed will likely opt for a modest 25-basis-point cut rather than a larger 50-basis-point move, as central banks prefer to conserve some "ammunition" for future challenges. The more "bullets" you fire, the faster you run out. Goldman Sachs termed this the “peak Goldilocks” for the stock market. Christian Mueller-Glissmann and team noted the market saw a "broad-based ‘risk-on’ shift" last week, particularly boosted by Oracle’s surge after posting bullish cloud revenue revisions. This also supported the broader artificial intelligence (AI) sector. They added that U.S. inflation data broadly in line with expectations, coupled with a slight rise in initial jobless claims, reinforced the idea of a "Goldilocks" backdrop, where a weakening U.S. labor market and anchored inflation allow the Fed to pursue a more accommodative monetary policy.

A Tense Meeting Ahead

Despite these expectations, don't expect a boring and predictable meeting. The atmosphere is charged with tension, as both Jerome Powell and Governor Lisa Cook face accusations of corruption from the Trump administration. They will all be in the same room with Christopher Waller, a new Fed governor appointed by Trump with the goal of pressuring the central bank to cut rates quickly. Markets are sure to see volatility on Thursday as Wall Street analysts dissect Powell's statement and the Q&A session that follows, searching for clues about the future path of interest rates.

Diverging Expectations

George Vessey of Convera told clients that a "25bp rate cut is fully priced in, and there is a very small chance of a larger 50bp move following recent signs of a cooling labour market. Investors will focus on the Fed’s updated macro forecasts, especially the interest rate path. The Fed is expected to lean towards continued easing by year-end. Voting splits will also be closely watched, as the FOMC members haven’t seen a three-way split since 2019." Comerica Bank Chief Economist Bill Adams said, “If Powell repeats his cautious guidance from his Jackson Hole speech in August, markets could abruptly reprice their pre-meeting aggressive rate cut expectations.”

Impact on the Dollar

Amid all these potential scenarios, continued easing by the Fed is expected to be supportive for equity markets. The one thing that is going down is the dollar. Expectations of a Fed rate cut, combined with the actions of the Trump administration, have pushed the U.S. currency to its lowest levels year-to-date. The Dollar Index has fallen 0.87% in the past month and 10.56% year-to-date. That is a big move for a currency. Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Investors should consult with a qualified financial advisor before making any investment decisions.