Stock Traders Bet on Another 50-Point Fed Cut – Are More S&P 500 Record Highs Ahead?

U.S. Stocks Rally as Markets Eye Another Fed Rate Cut

U.S. stock futures surged early Thursday, buoyed by optimism following the Federal Reserve’s recent decision to cut interest rates by 50 basis points. This marked the first rate reduction since the early days of the COVID-19 pandemic, signaling the Fed’s commitment to easing monetary policy to counter economic softening.

A Second 50 Basis Point Cut Possible?

Traders are speculating that if the Federal Reserve is willing to cut by 50 basis points now, it could do so again at its upcoming meetings in November or December. While Fed Chair Jerome Powell downplayed the possibility, saying, “this process evolves over time” and cautioning against pre-commitments, the market remains optimistic. The Fed’s “dot plot,” which maps out future interest rate expectations, indicates another 50 basis points of rate cuts could be on the table before the end of 2024.

The central bank now sees the federal funds rate at 4.4% by the end of the year, down from the current range of 4.75%-5%. Powell’s comments suggested no rush, but with two more meetings left this year, the possibility of an aggressive cut still lingers.

Inflation and Employment Signals

The Fed cited confidence in inflation’s downward trend toward its 2% target as one reason for the recent cut. The post-meeting statement indicated that inflation risks are now more balanced, and the latest projections show inflation falling to 2.3% from 2.6% this year, with core inflation dropping to 2.6%. Meanwhile, the Fed raised its unemployment rate projection to 4.4%, acknowledging the slowdown in job gains.

However, Powell stressed that the Fed’s goal remains to curb inflation without triggering a significant rise in unemployment. With inflation easing and employment data holding steady, further rate cuts might be needed to maintain the balance the Fed desires.

Historical Context and Future Outlook

The Fed’s half-point cut, while significant, is not unprecedented. During the 2008 financial crisis and the early COVID-19 pandemic, the Fed used similar tools to stabilize the economy. Traders now believe that the Fed may replicate this strategy if the economic outlook doesn’t improve swiftly. The fact that inflation has moderated and the labor market remains soft suggests that the Fed may have room for another large cut.

Powell’s reluctance to pre-commit, however, keeps markets on edge. As more data on inflation and employment roll in, November’s meeting could still present a chance for another bold move. With the dot plot projecting rates to reach 3.4% in 2025 and 2.9% by 2026, the likelihood of further cuts is strong.

Market Forecast: Bullish Sentiment

Given the Fed’s actions and the market’s optimistic reaction, a bullish outlook seems to dominate. Stock markets have rallied on hopes of more rate cuts, and with inflation trending downward, investors are betting that looser monetary policy will continue to support economic growth and equity performance in the near term. If the Fed cuts another 50 basis points in November, we can expect a sustained rally in risk assets.