The Federal Reserve gave investors exactly what they wanted. said U.S. officials announced a 50 basis point interest rate cut on Wednesday, but it wasn’t enough. After a brief rally following the initial announcement, stocks went through a period of extreme volatility before all three major U.S. stock indexes ended Wednesday lower.
The Dow Jones Industrial Average fell 0.25%, while the S&P 500 and the tech-heavy Nasdaq Composite fell 0.29% and 0.31%, respectively.
Markets sold off even as Fed Chairman Jerome Powell told reporters at his post-FOMC meeting press conference that the 50 basis point rate cut was intended to demonstrate officials’ “confidence” that current strength in the labor market can continue with an “appropriate recalibration” of monetary policy.
While no one can definitively know the reason behind stocks’ negative reaction to what should have been a massive interest rate cut to boost the market, Rick Rieder, CIO of Global Fixed Income and head of BlackRock’s global allocation investment team, offered one theory.
Reviewing the Fed’s summary of economic projections, Rieder noted that Fed officials have projected two more 25-basis-point rate cuts this year, and another 100 basis points in 2025. That’s a lot, but it’s not what investors had anticipated before the meeting.
“The market has priced in a rate path that more closely resembles what an impending recession would require…as opposed to recalibrating rates toward a less restrictive or neutral policy path, which is what we think this cycle likely represents,” he said. Fortune by email.
Essentially, even though markets got their juicy 50 basis point short-term rate cut, Fed officials’ long-term outlook for interest rates was not as attractive as expected.
Thomas Simons, senior economist at investment bank Jefferies, echoed those expectations in a note to clients Wednesday. “The long-term rate continues to be revised higher, implying a higher terminal rate. Today’s 50 basis point cut was a dovish surprise, but we don’t see signs that more significant cuts are coming,” he said.
The economy is doing “well” and “we are not behind”
There is another possible reason for the negative reaction in stock markets to Wednesday’s Fed decision. Some see the disproportionate interest rate cuts by Fed officials as a sign that they have recognized that they should have started cutting rates months ago.
Powell addressed those concerns at his news conference Wednesday. “We don’t think we’re behind… You can take that as a sign of our commitment not to be behind,” he told reporters.
But many experts aren’t convinced. “The Fed believes it’s behind the curve,” said Robert Minter, director of ETF investment strategy at abrdn. Fortune by email.
This skepticism is not without reason. Powell himself has admitted that if Fed officials had known about the July jobs report before that month’s FOMC meeting, they probably would have cut rates then. “If we had the July jobs report before the meeting, would we have cut rates? We might have,” he said. “We didn’t make that decision. But you know we might have.”
Robert Frick, a corporate economist at Navy Federal Credit Union, even argued that the Fed may be concerned that labor market data may not be as reliable as it thought after revisions to previous employment data showed the U.S. economy employed 818,000 fewer people between March 2023 and March 2024 than initially reported.
“The half-point cut is an admission that the Fed is behind schedule, but not a sign of panic,” Frick said. Fortune by email. “The Fed relied on the data, but doubts about the data turned out to be well-founded because they did not paint an accurate picture of the labor market.”
“With inflation largely under control, the Fed must quickly improve hiring conditions and boost investment to create more jobs,” he added.
Once again, Powell attempted to address concerns about the labor market and economic weakness during his press conference.
“The American economy is doing well,” he said. “It’s growing at a solid pace. Inflation is down. The job market is strong. We want to keep it there. That’s what we’re doing.”
“I don’t see anything in the current economy that suggests that the probability of a recession – sorry, an economic slowdown – is high,” he added.
Some experts also praised Powell’s decision to cut rates by 50 basis points. “For the first time since the pandemic, this Fed has taken an aggressive step to get ahead of the curve in cutting rates to ensure the economy doesn’t slide into recession,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. Fortune by email.
It may be this divergence of opinion among experts that led to the volatility seen Wednesday. Steven Wieting, acting chief investment officer at Citi Wealth, warned that this could happen ahead of the Fed’s announcement, noting that volatility is common as investors digest the Fed’s decisions and their myriad potential implications.
Powell also made another, potentially market-depressing comment on Wednesday.
As for the outlook for the neutral rate — the level where monetary policy becomes neither stimulative nor accommodative — Powell said he believes “we will not go back” to the near-zero rates that had become common before the pandemic.
“My sense is that the neutral rate is probably considerably higher than it was at the time,” he said.
With many investors looking for evidence of where interest rates will go, not just in the short term but years into the future, that comment could have exacerbated the stock market slide.
