Why the Fed may do another 'jumbo' cut?

The Dow Jones Industrial Average and the S&P 500 have reached record highs as stocks rally following the Federal Reserve's interest rate cut last week. With an aggressive 50 basis point cut initiating the easing cycle, Wall Street is trying to gauge the Fed's next move and its implications for markets going forward.

A “soft landing” in the US economy

The U.S. Federal Reserve’s substantial interest rate cut is set to ensure a "soft landing" for the U.S. economy as inflation declines and the labor market cools, according to an expert.

"The Fed took a more dovish turn, not only by cutting the federal funds rate by 50 basis points, surpassing the widely expected 25 basis points, but also by signaling more aggressive cuts through 2026 than previously communicated," said Martin Wurm, a director at Moody’s Analytics, in an interview with Anadolu.

Last week, the Fed lowered its interest rate by 50 basis points to a range of 4.75%-5.0%, marking the beginning of an assertive shift toward monetary easing. This move represents the central bank’s first rate cut in over four years, since the onset of the COVID-19 pandemic.

Except for the emergency rate cuts during the start of the pandemic, the last time the Fed delivered a 50-basis-point rate cut was during the global financial crisis in 2008.

Although investors were initially worried that the jumbo cut was delivered to avoid a possible recession in the US economy, Wurm believes the Fed is sure of a soft landing, a situation when a central bank raises interest rates too much and too high, leading to an economic slowdown but avoiding a recession.

US stocks rallied after the Fed’s announcement

US stocks gained for a third consecutive week — despite languishing on Friday — as investors were repeatedly reassured that the economy is cooling without falling off a cliff.

The Dow Jones Industrial Average surged 1.26%, closing above a record 42,000 points, while the S&P 500 crossed the 5,700-point mark for the first time in history, gaining 1.7%. The Nasdaq also saw a significant rise, jumping 2.51%.

"Stocks have surged overnight, with 'green on the screen' globally as buyers step back in," said Michael Brown, senior research strategist at Australia-based forex and brokerage firm Pepperstone, in an interview with Anadolu.

Recent commentary from Federal Reserve officials over the past five days has done little to alter market expectations regarding the central bank’s policy direction. On Friday, St. Louis Fed President Alberto Musalem expressed support for "gradually" lowering interest rates following last week’s significant cut. Meanwhile, Fed Governor Michelle Bowman reaffirmed her belief that the U.S. economy remains strong. On Thursday, Fed Chair Jerome Powell, in a pre-recorded speech, provided no specific insights on the economic outlook or future monetary policy plans.

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