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Fed dares "jumbo cut" and abandons restrictive policy

Federal Reserve Chairman Jerome Powell made a bold move to lower key interest rates by 50 basis points, marking the start of a long-awaited interest rate turnaround and the first cut in four years. On Wall Street, the Dow and the broad S&P 500 reached new record levels in volatile trading immediately after the interest rate decision. However, the momentum could not be maintained and profit-taking set in. In Asia, most stock indices rose, some significantly, in the wake of the Fed decision. Attention is now turning to the Bank of Japan's interest rate decision on Friday and the Bank of England's announcement this afternoon.

Date: 19 September 2024
Author: Alessandro Fezzi, LGT Research Content & Publications
Reading time: 5 minutes

With a half-percentage-point interest rate cut, the US central bank is also abandoning its restrictive monetary policy. The new range for the key interest rate has thus been narrowed to 4.75% to 5.00%. Capital markets had been expecting a more moderate move of around 25 basis points, as core inflation remains stubbornly high. However, the general inflation rate had fallen to 2.5% in August and the labour market showed clear signs of cooling. This opened the door for the Federal Open Market Committee (FOMC) to make a clear interest rate turnaround. The vote was 11:1, with Governor Michelle Bowman preferring a quarter-point interest rate change. With a view to the next interest rate decisions, the Fed's dot plot suggests that a further interest rate easing of 50 basis points can be expected by the end of the year. This is also roughly in line with expectations in financial markets. However, Fed Chairman Powell was cautious about the further path and left all options open.

Wall Street initially set new records but then lost momentum

In New York, the stock indices initially reacted to the Fed's decision by setting new records. However, profit-taking set in during the day and the Dow Jones Industrial ended up losing around 0.2% compared to the previous day, closing at 41,503.10 points. The S&P 500 also closed 0.3% lower at 5618.26 points after a brief rally to a record high. On the Nasdaq, the indices fell by almost 0.5%. On the bond market, the yield on ten-year US government bonds rose to 3.71%.

Markets in Asia react positively to Fed decision - focus on the Bank of Japan

On Asia's stock markets, the indices mostly rose on Thursday amid choppy trading. In Tokyo, the Nikkei 225 rose 2.5% and the broad-based Topix gained 2.3%. The Japanese yen weakened against the US dollar by around 0.7% to 143.25 after the Fed's significant interest rate cut. The focus is now on the Bank of Japan's interest rate decision on Friday. However, a further increase in interest rates is not expected for the time being. In lockstep with the Fed, the Hong Kong Monetary Authority cut its interest rate by 50 basis points to 5.25%. The Hang Seng Index in Hong Kong rose by 1.2%. The CSI 300 in mainland China rose by 1.3%, led by real estate stocks. By contrast, South Korea's blue-chip Kospi index slid by 0.3% after initially opening higher, while the small-cap Kosdaq index gained 0.1%. Australia's S&P/ASX 200 gained just under 0.4%.

Bank of England likely to wait and see for the time being

Inflation in the UK remained stable in August. The annual rate of consumer price inflation was unchanged at 2.2%, which had also been expected by analysts. On a monthly basis, British consumer prices rose by 0.3%, driven by higher prices for transport and clothing. However, core inflation rose significantly in August, albeit as expected, from 3.3% to 3.6%. Considering this, the Bank of England is not expected to adjust key rates when it announces its decision today (1:00 p.m. CET) and will instead wait and see how inflation and the economy develop. The British central bank had already implemented a turnaround on interest rates at the beginning of August. As a result, the British pound rose in response to the latest inflation data.

Bundesbank president does not expect ECB to ease interest rates quickly

According to Joachim Nagel, president of the German Bundesbank, the European Central Bank (ECB) will not lower key interest rates as quickly and as sharply as it has raised them before. The decisive factor will be the further development of economic data. The Bundesbank president is concerned about the slow decline in wage pressure. According to Nagel, the ECB's monetary policy must remain sufficiently tight to ensure that the inflation rate returns to the target of 2% in the medium term. Most recently, inflation in the eurozone was 2.2% in August.

Corporate and economic calendar

Corporate news in focus: FedEx Q1, Next Q2.

Economic data in focus: Trade balance Switzerland, interest rate decision Norway, Bundesbank monthly report Germany, Bank of England interest rate decision and from the US: initial jobless claims, existing home sales and the Philly Fed manufacturing indicator.

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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