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the federal reserve announced its first interest rate cut since 2020, slashing its benchmark rate by half a percentage point in an effort to stem a slowdown in the labor market.

as the us employment situation and inflation are both weakening, the federal open market committee of the federal reserve decided to cut the key overnight lending rate by 50 basis points. previously, the market did not reach a consensus on the extent of the rate cut. therefore, after the announcement of the news, the market reacted greatly and the us treasury yields fluctuated significantly.

data source: wind

aside from the emergency rate cut in 2020, the last time the federal open market committee cut rates by 50 basis points was during the 2008 global financial crisis.

u.s. stocks closed lower on wednesday as a sharp rate cut was initially welcomed by traders, although it did raise concerns that the federal reserve was trying to get ahead of potential economic weakness.however, federal reserve chairman powell believes that there is no sign in the us economy at present that the possibility of a recession has increased.

the dow jones industrial average fell 103.08 points, or 0.25%, to 41,503.10. it had risen as much as 375.79 points after the fed's decision. the s&p 500 fell 0.29% to 5,618.26. the nasdaq composite fell 0.31% to 17,573.30.

data source: wind

bank stocks hit session highs after the federal reserve cut interest rates by half a percentage point. the spdr s&p bank etf rose 2.4%, with servisfirst bancshares and glacier bancorp both rising more than 4%. the spdr s&p regional bank etf rose 3.3%, on track for its biggest one-day gain since aug. 23.

in terms of commodities, after the federal reserve announced a rate cut, concerns about recession triggered a price drop. crude oil and natural gas prices generally fell, with nymex wti crude oil at $69.15, down 1.16%, and ice brent crude oil at $72.14, down 1.19%. ine crude oil prices fell less, by 0.31%, to 516.3 yuan. nymex natural gas prices fell 1.42% to $2.291.

precious metal prices were generally weak, with london gold trading at $2,558.830, down 0.40%; london silver trading at $30.057, down 2.04%.

some analysts said the more aggressive decision to cut interest rates by 50bp showed that the fed was convinced that the downward trend in inflation was sustainable and might now be shifting its focus to avoid keeping interest rates too high for too long, putting pressure on the economy.

some of the decline in u.s. stocks on wednesday may have been due to the sharp rally before wednesday's rate cut. the s&p 500 is up nearly 18% this year and more than 1% in the past month.

the fed’s rate cut marks the sixth time in the past three decades that the central bank has shifted from raising to lowering rates. typically, when the fed begins cutting rates, it doesn’t know whether it will take a few small steps, as it did in 1995 and 1998 when the economy avoided recessions, or begin a longer series of cuts, as it did in 2001 and 2007.

the 50bp rate cut decision lowered the federal funds rate to a range of 4.75%-5%. while the interest rate determines banks' short-term borrowing costs, it will spill over to a variety of consumer products such as mortgages, auto loans and credit cards.

in addition to this rate cut, the committee also indicated through its "dot plot" that it would reduce interest rates by another 50 basis points by the end of the year, close to what the market is pricing in.the matrix of expectations from individual officials shows another 1 percentage point cut by the end of 2025 and another 0.5 percentage point cut by 2026. overall, the dot plot suggests the benchmark rate will fall by about 2 percentage points from wednesday.

"the committee has increased its confidence that inflation will continue to move toward 2 percent and judges that the risks to achieving its employment and inflation goals are roughly balanced," the statement said after the meeting.

the decision to ease was made "in light of the progression of inflation and the balance of risks." notably, the fomc voted 11-1, with governor michelle bowman favoring a 25 basis point rate hike.

“we’re trying to achieve a situation where we restore price stability without having the kind of painful increases in unemployment that accompany inflation. that’s what we’re trying to do, and i think you can take today’s action as a sign of our strong commitment to achieving that goal,” fed chairman jerome powell said in a news conference after the decision.

fed officials noted that job growth has slowed and unemployment has risen, but remains low. federal open market committee officials raised their unemployment forecast for this year to 4.4% from 4% in june and lowered their inflation forecast to 2.3% from 2.6% previously. for core inflation, the committee lowered its forecast to 2.6%, down 0.2 percentage points from june.

the atlanta federal reserve expects the u.s. economy to grow 3% in the third quarter due to continued strong consumer spending. in addition, the fed chose to cut interest rates sharply even though most indicators showed inflation was well above the central bank's 2% target. the fed's preferred indicator shows inflation at around 2.5%, well below its peak but still higher than policymakers expected.

powell and other policymakers have expressed concerns about the labor market in recent days. while layoffs show little sign of rebounding, hiring has slowed markedly. in fact, the last time monthly hiring was this low (3.5% of the labor force), the unemployment rate was over 6%.

in a press conference after the july meeting, powell had said a 50 basis point rate cut was "not something we're considering right now." so, at least for now, the move helps to quell a debate over how aggressive the fed's initial moves should be.

however, it set the stage for future questions about how far the central bank should go before stopping cutting rates. members were widely divided over where rates will go in the coming years.

“this is not the beginning of a series of 50 basis point rate cuts, and i think powell really squashed that idea to some extent,” said tom pocelli, chief u.s. economist at pgim fixed income. “it’s not that he doesn’t think it’s going to happen, but he doesn’t, he didn’t pre-commit that it was going to happen. this is the right thing to do.”

// market performance after rate cut //

overall, across all cycles, the s&p 500's performance after the first rate cut has been largely positive, with some exceptions during downturns.overall, the s&p 500 was higher 70% of the time after three and six months and 80% of the time after a year, according to canaccord genuity, which looked at the last 10 easing cycles since 1970.

the s&p 500 has risen an average of 5.5% in the first three months following an initial downgrade, 10.6% after six months and 11.3% after one year.

but if you exclude the scenario of a subsequent recession and use only the soft landing scenario (which is the consensus this time), the performance is better. canaccord genuity defines a recession scenario as the economy is already in a downturn or enters a downturn within 12 months of the first rate cut.

in years when the s&p 500 didn’t experience a recession during or shortly after the first rate cut — such as 1984, 1989, 1995 and 1998 — the benchmark index was higher 100% of the time three, six and 12 months later.

others have also noted the disparity, with bank of america securities highlighting the pattern in a recent report.

“easing cycles themselves are not necessarily positive. in fact, the s&p 500 has lower returns on average following the first rate cut, but there are clear differences depending on economic conditions,” the firm’s ohsung kwon wrote on monday.

kwon said that in the 100 trading days after the first rate cut, the s&p 500 rose only 20% if a recession occurred within six months, but rose 100% if there was no recession, an average gain of more than 8%.

by sector, canaccord genuity noted that the three sectors with the highest average returns after one year were communications services, information technology and health care. the worst performing sectors 12 months after a rate cut were materials, utilities and consumer discretionary.

bmo capital markets chief investment strategist david belsky said rate cuts could be a boon for growth stocks.

“against this backdrop, we believe the equity rally will extend and growth stocks, particularly technology stocks, still have the potential to rise further,” belski said in a note wednesday. “furthermore, while historically, fed rate cuts in non-recessionary periods have been positive for stocks overall, they also make growth stocks more attractive because lower rates increase the present value of these companies’ future cash flows.”

belsky added that the ai ​​growth story "shows no signs of ending right now," and he expects earnings growth for global tech companies to be between 15% and 20%. he expects a soft landing for the u.s. economy, with earnings per share for s&p 500 companies to rise 11% this year and 8% by 2025.