The US Federal Reserve decided to cut interest rates by 25 bps, in line with market expectations. This is the first rate cut after the great financial crisis. Powell called the cut a “midcycle adjustment” and said policymakers were not embarking on a new cycle of rate cutting. As the markets expected a dovish Fed, Powell’s hawkish commentary disappointed them. The Dow plunged as much as 478 points and ended down 333 points in its worst day since May.
The latest figures from CME Group’s FedWatch tool shows that the markets expect a 25 bps rate cut in September. However, the probability is not overwhelmingly high enough. For the rate level at the year end, the markets believe the Fed will cut interest rates by 25 bps or 50 bps. According to past data, as long as the economy does not fall into recession, the average 12-month return of Dow is 24% after the 1st rate cute.
Figure 1: The markets believe the Fed will cut interest rates by 25 bps or 50 bps
Photo: CME Group