Fed cuts rates, as US assets have best day of 2024

The FOMC cut interest rates as expected tonight, and US interest rates are now 4.75% to 4.5%. The accompanying statement did not give us too much new information. The Fed sees economic activity expanding at a solid pace, they see the unemployment rate as remaining low and inflation remaining ‘somewhat’ elevated but making progress towards the Fed’s 2% target rate.

Fed stays data dependent for now

The Fed has said that it remains data dependent and will continue to ‘monitor the implications of incoming information for the economic outlook’. The elephant in the room is obviously the election of President Trump. Many of Trump’s economic proposals could have big implications if passed into law, not least tariffs. This line in the statement suggests that the Fed is ready to adjust policy if Trump’s new economic order of tariffs and low taxes boosts inflation.

Trump can’t fight the Fed

Jerome Powell spent most of the press conference fielding questions about President elect Trump. He said it was too early to know the exact economic policies of the Trump administration. This is a wise move, as in the last administration, what the President said and did were two different things. However, Powell did say that Fed officials will not adjust their economic forecasts until a policy has been enacted or put into law. This means that next month’s Fed forecasts and Dot Plot will not be affected by plans that the Trump administration currently have for the US economy. Instead, the March forecasts are likely to be the first ones that assess Trump’s economic policies on the outlook for US GDP, CPI and the future path for interest rates.

President Trump was critical of the Fed during the election campaign, however, when asked if he would resign if Trump asked him to, the governor of the Fed reminded the world that it is not permitted under US law for a President to fire or demote him. His term ends in 2026, so Trump may find that it is hard to fight the Fed.

Fed swerves forward guidance

Overall, Powell did not give any concrete forward guidance on the future path of interest rates. He said that the balance of risks are equal when it comes to policy change at the December Fed meeting. Although he said that policy is still restrictive, he also said that the Fed could take their time when it comes to bringing rates to neutral levels, because the economy remains strong.

Market impact

The market impact of this meeting has been limited due to the large price moves earlier this week in the aftermath of the US election. There is still a 71% chance of another consecutive rate cut at the Fed’s December meeting, however if we get strong economic data in the interim, or an upside surprise to inflation, this could be revised lower. The long-term implied interest rate for December 2025 has fallen on Thursday and is currently 3.69%, down from 3.77% on Wednesday. However, this is not a reaction to the Fed meeting. Instead, it is a reaction to the decline in yields. US Treasury yields have fallen across the curve, the 10-year is down 10 basis points, and the 2-year yield is lower by 6 basis points. This move lower in US yields is a reaction to the Trump trade. On Wednesday, US yields surged too far, and the price action on Thursday suggests that some normality is returning to the bond market now that the election is behind us.

US assets continue to shine

The era of American exceptionalism continues and has not been dimmed by the outcome of the election. US assets had their best day of 2024 on Thursday, with stocks, bonds and commodities all rising in unison. The S&P 500 is approaching the key 6,000 level and WTI crude oil rose by 0.93%. Bitcoin backed away from record highs on Thursday, as it approached $76,000. The Vix index, Wall Street’s volatility gauge is also weaker on Thursday and is now at its lowest level in over a month.

US financial markets have warmly welcomed the win for Trump and the Republicans. However, are stocks rallying because of Trump’s economic pledges? Or is it a relief rally now that the election is out of the way, and there was no civic disorder? If it is the former, then we could see markets continue to extend gains.

The gains in the S&P 500 have been broad, with 1% + moves for the IT sector, communication services, consumer discretionary and real estate. However, the rally on Thursday was led by large caps, with medium caps backing away from Wednesday’s record high. However, the decline in US bond yields could limit the downside for the Russel 2000 at the end of this week, and we expect risk sentiment to remain positive on Friday.