The FOMC Lowers Interest Rates, Signals Pause
Key Takeaways
- Technology shares rise for 13 straight days.
- The Fed cuts the federal funds rate to 3.75%.
- Silver surges.
Equities eked out a gain on the week after posting their best return on a FOMC day since March. The S&P 500 finished the week up 0.6% with small caps outpacing to the tune of 1.9%. Core bonds finished the week down as longer dated yields increased. The 10-year Treasury has been range bound the last three months between 4.20% and 3.95%. This week tested the upper end of the range as some economic data supports steady growth.
Economic data has come in better than previous pessimistic forecasts. The Citi Economic Surprise Index sits around +16 versus -26 in June. Consumer confidence remains low, but job openings came in higher than expected. Jobless claims also remain in the low 200,000 area.
Previously we highlighted studies suggestive of equity market upside based on strong price action following the recent pullback. The State Street Technology Select Sector ETF has risen for 13 straight days. The ETF dates to 1998 and is now the longest winning streak ever. This type of action following pullbacks supports a cautiously optimistic outlook.
The FOMC lowers interest rates
The Federal Open Market Committee cut interest rates on Wednesday. The federal funds rate is now 3.75%, down from a peak of 5.5%. Three members dissented with two in favor of no change and one opting for a 50 basis point cut instead of 25 basis points. The last time there were three dissents was in September 2019.
Projections among voting members call for only one cut 2026, although the range among individuals is quite wide. The market is pricing in two cuts. Fed Chair Powell said the Fed is now within a plausible range of the neutral rate and well positioned, which most interpret as a signal for pausing.
The FOMC will start buying short-dated government bonds this week to maintain ample reserves. The initial amount of $40 billion is viewed by some analysts as quite large. The amount is expected to drop somewhat but the FOMC continues to provide liquidity in anticipation of problems. Historically, they were more prone to only reacting to market drawdowns before doing what was necessary. Powell continues to say these are only technical issues and separate from any monetary policy stance.
The market might be saying something else with silver prices up 4.5% one day later. Silver prices are up more than 150% since the Fed stopped interest rate hikes in 2023.
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Sources: BTC Capital Management, Bloomberg
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