The Fed sees its jumbo rate cut as a one-and-done — that's good news for stocks

Good morning to the smartest corner of the internet. Three Federal Reserve officials will speak this morning, kicking off a busy week of speeches coming out of the central bank.

Today’s edition unpacks what the latest Fed decision means for stock market investors.

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Investors rejoice

The Federal Reserve surprised some market-watchers last week with its decision to cut interest rates by 50 basis points.

So long as the labor market doesn’t unravel, central bankers don’t expect to make the same decision twice — and that’s good news for the stock market.?

According to the dot plot, policymakers seem to believe the jumbo move was a one-and-done.

Most Fed officials see two smaller cuts coming in November and December, and four more quarter-point cuts in 2025.?

Investors have taken the outlook in stride and put stocks on pace to notch their first winning September in five years.?

“The Fed delivered on what we thought was the best short-term case for stocks,” wrote Morgan Stanley’s Mike Wilson in a note to clients early Monday.?

During his post-meeting press conference, Fed Chair Jerome Powell maintained that his team made the call from a position of confidence, rather than panic.?

“Inflation is coming down closer to our 2% objective over time, and the labor market is still in solid shape,” Powell said. “Our intention is really to maintain the strength that we currently see in the US economy.”

To Powell’s point, the unemployment rate remains low by historical standards. And even though hiring has slowed down, that hasn’t coincided with widespread firings.

The Fed’s latest outlook suggests unemployment will reach 4.4% before year’s end, then stay at that level through 2025.?

In Morgan Stanley’s view, a spike in unemployment poses the biggest risk to the economy and the stock market.?

Meanwhile, Bank of America analysts are focused on layoffs, which remain muted.?

“Although job growth has undoubtedly softened, we think layoffs hold the key to a recession,” the firm wrote in a Friday note.

“A spike in layoffs would create a negative feedback loop between weakening consumption and a weakening labor market.”

Some commentators have cautioned that the Fed’s choice to kick off a policy-easing cycle with an outsized cut signals panic, rather than confidence.?

It’s a fair assessment. As Opening Bell Daily has covered plenty, not everything looks rosy:?

• Corporate bankruptcies have surged
• Consumer confidence isn’t great
• Shaky manufacturing and business sector
• Some Wall Street firms have lowered their GDP estimates

While uncertainty still runs high, the central bank doesn’t seem concerned —?and markets are mirroring that optimism.?

Comments, contentions or feedback? Leave a comment below.

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