- On Wednesday, the Federal Reserve cut interest rates by 50-bps.
- Markets are pricing a 44% chance of another 50-bps Fed rate cut in November.
- Data on Thursday revealed that US unemployment claims fell to 219,000 last week, well below forecasts of 230,000.
Interest futures fell on Thursday and Friday as investors preferred riskier assets like equities after the Fed delivered a massive rate cut. Moreover, a significant drop in US jobless claims increased risk appetite, sending more investors to Wall Street.
On Wednesday, the Federal Reserve cut interest rates by 50-bps, ending months of speculation on the timing and size of the first cut. The massive cut surprised many since it was bigger than the forecast of 25-bps. The Fed had every reason to start with a gradual pace. The economy was stable, and inflation had risen slightly more than expected in August. However, policymakers are more confident that they have tamed inflation. Therefore, they voted for the big rate cut.
The initial reaction was mixed, as there were fears that the US economy could deteriorate. However, soon after, investors rushed for riskier assets, which soared to new highs. Meanwhile, interest futures declined. At the same time, rate cut expectations soared, with markets pricing a 44% chance of another 50-bps rate cut in November.
Lower borrowing costs spur economic growth, which boosts businesses. Therefore, traders foresaw the upcoming period of growth, which will especially benefit the equities market.
Market participants were also optimistic about the US labor market after Powell’s remarks. The Fed has remained keen on employment, which drives the economy. Powell noted that the massive rate cut was meant to keep unemployment rates low. Stable job growth will keep the US economy on solid ground.
US jobless claims (Source: Labor Department)
Furthermore, data on Thursday revealed that US unemployment claims fell to 219,000 last week, well below forecasts of 230,000. Fewer jobless claims indicate a low unemployment rate and a resilient labor market.
Earlier in the week, US retail sales rose more than expected, indicating solid consumer spending in August. Sales increased by 0.1%, surprising economists who had expected a decline of 0.2%. A steady economy shows that the Fed will likely achieve a soft landing. However, the bond market suffers when risk appetite soars. More cash in the economy flows to riskier assets like stocks, which give better returns during periods of economic growth.
