J K Nagpal’s Post

Interest Rate Cuts And The S&P 500 The relationship between interest rate cuts and the S&P 500 is a fascinating subject that intertwines monetary policy with investor sentiment. When the Federal Reserve signals an interest rate cut, it often leads to a multifaceted reaction in the stock market. Notably within the S&P 500 index. Last week is an inflection point. Despite recent inflation data, Powell and the Federal Reserve scrapped their 2% inflation mandate and told the market that they would cut rates anyway. Read More: https://lnkd.in/gDeKQ6Ak

The Federal Reserve signaled interest rates could likely remain higher for longer than previously expected on stalling disinflation following an unchanged rate decision on Wednesday and the central bank said it would slow its pace of quantitative tightening starting next month.  In recent months, there "has been a lack of further progress toward the Committee's 2 percent inflation objective," the Federal Open Market Committee, the FOMC, said in a statement as it kept its benchmark rate in a range of 5.25% to 5.5%.Since the turn of the year, inflation data have surprised to the upside, forcing investors to rein in their bets on rate cuts. Investors now only expected one rate cut this year, according to Blueprint Fed Rate Monitor Tool, well below the six or seven seen at the start of the year.In the press conference that followed the monetary policy statement, Powell acknowledged that the recent upside surprises in the inflation data have likely delay the start of rate cuts."So far this year, the data have not given us that greater confidence ... It is likely that gaining such greater confidence will take longer than previously expected," Powell said Wednesday. The pricing out of rate cuts, however, has led to jump in Treasury yields, and tighter financial conditions, which some believe could help curb price pressures.“If Jay Powell aims his caution only at the medium term (the next few months) the impact may be muted, though, as the swap market has already absorbed a "hawkish" multi-month delay to rate cuts,” Macquarie said in a note, ahead of Powell’s press conference.The Fed also said it would begin to slow its balance sheet reduction, or quantitative tightening program next month, which was launched in 2022 to shrink the assets it holds on its balance sheet.Beginning in June, the Fed will allow about $25 billion in Treasury securities to roll off its balance sheet, down from the current pace of $60 billion.

After months of a "higher for longer" mentality, traders are finally betting that the Federal Reserve will cut interest rates. This can be seen in the fall in the 2-year Treasury yield, which fell from 3.86% to 3.79% between 8am and 5pm (as of September 4th). Although this is a modest intraday move, it reflects a broader shift in market sentiment over time. Coupled with dovish comments from Fed Chairman Jerome Powell at Jackson Hole, the market is increasingly pricing in rate cuts and the possibility of a soft landing, which was previously thought to be unlikely. Traders have been anticipating rate cuts since the summer, which is reflected not only in the falling yield on the US 2-year Treasury note (5.03% on May 1st vs. 3.76% today), but also in the falling yield on the 2-year Gilt. According to Bloomberg, the 2-year gilt is one of the most sensitive securities to changes in monetary policy. But why do gilt yields, and bond yields in general, fall when a rate cut is expected? When interest rates are expected to rise, bond yields rise because newly issued bonds offer higher interest rates, making existing bonds with lower interest rates less attractive. As a result, investors sell existing bonds, pushing their prices down and yields up. However, when a rate cut seems likely, the opposite happens. Investors buy bonds in anticipation of lower future interest rates, making today's yields more attractive by comparison. This increase in demand pushes bond prices up and yields down, as bond prices and yields are inversely related. Sources: -             https://lnkd.in/e3DKGAP7 -             Bloomberg (2024) Us Generic Govt 2 Yr Index. [Accessed 05/09/2024] -             https://lnkd.in/eWfq7k-Z -             https://lnkd.in/e6H6uxZp -             https://lnkd.in/e2jgsq_r -             https://lnkd.in/ejsjV_kr.

Over the past two months the case for Federal Reserve rate cuts has taken on some serious water. This leaves investors with an important question. What will the Fed do next? Will it try to get ahead of the curve and beat back the expectations of imminent rate cuts that it raised in December? Or will the Fed deliver on the promise of rate cuts, even though the macro backdrop is no longer so supportive of easier policy? Read more here: https://ow.ly/oPE050R4mbz

🔔 25 bps Cut Today & Fed Signals Caution The #FederalReserve just approved a quarter-point interest rate cut, bringing the federal funds rate to a 2-year low of 4.25%-4.5%. But the bigger headline? The Fed is signaling a slowdown in rate reductions moving forward. After cutting #interestrates by a full percentage point since September, officials are dialing back expectations, penciling in just two rate cuts for 2025—down from the four previously anticipated. Fed Chair Jerome Powell noted, “Having lowered rates by 1 percentage point, we can now be more cautious.” This shift reflects stronger-than-expected labor markets and lingering inflation uncertainties. 📉 Markets React: #Stocks dipped, Treasury yields climbed, and sectors sensitive to high rates, like housing, remain under pressure despite recent cuts. 📊 The Bigger Picture: #Inflation is easing, but unevenly, and potential policy shifts from the incoming administration—like tariffs—could complicate things further. 🏠 Key Takeaways for #CRE & Housing: Borrowers are seeing some relief in short-term rates, but rising long-term costs continue to impact sectors like housing, with new home inventory at a 15-year high. The Fed’s balancing act between supporting growth and containing inflation is one to watch as we head into 2025. What are your thoughts on this shift in monetary policy? Drop your comments below!

Here's why focusing on the Federal Reserve's interest rate announcement is not as important as the media portrays it. There's a futures contract that tracks the federal funds rate that is traded on the CME exchange. And that will give you a probability of the Fed's next move on interest rate day. Go to the CME Group website to see the different probabilities. Link below. If we look at June 12, 2024, there's a 90% chance that the Fed's rate will still be under 5.25 to 5.50. So by September 18, 2024, there's a 65% chance that the rate will be between 5% and 5.25, and they will have cut by 25 basis points. And then, you can see the curve throughout the year and 2025. You can see that those probabilities will shift based on market events. But even before the Fed's rates announcement, you can see the likelihood of that meeting. So you don't have to focus much on the meeting because the Federal Reserve usually follows the market. The Federal Reserve does not want to spook the market or create unnecessary volatility. Therefore, it is trying to communicate as much as possible ahead of time about its interpretation of the economic data. They always say that they're data-dependent, but they're also trying to give as much clarity to investors as possible based on the data, which is already priced by the market. Link: https://lnkd.in/gb7ru7VB #FederalReserve #InterestRates #MarketAnalysis #FinancialMarkets #EconomicData #CMEGroup #MarketProbabilities #InvestorInsights #DataDriven #MarketEvents

The Federal Reserve maintained interest rates at 5.25%-5.50% and announced a slowdown in its balance sheet reduction, marking a significant pivot in its monetary strategy. Starting June 1, the Fed will lower the cap on maturing Treasury securities from $60 billion to $25 billion monthly, while maintaining the $35 billion cap for mortgage-backed securities. This cautious approach reflects concerns over recent inflation trends and economic balancing efforts. With traders eyeing potential rate cuts as soon as November, Fed Chair Jerome Powell underscored that a rate hike is off the table for now. https://lnkd.in/d-QXP8tk #FederalReserve #EconomicPolicy #InterestRates #InflationControl #FinancialMarkets

The Federal Reserve’s recent significant interest-rate cut is sending waves through the financial markets, with more reductions anticipated in the coming months. Investors are turning to historical patterns to assess what may come next. Historically, after the Fed initiates rate cuts, investments such as stocks and corporate bonds have performed well over the following 12 months. However, the outcome is largely tied to the broader economy’s performance. If the economy maintains growth, or if the cuts successfully stimulate it, corporate profits tend to remain robust. But if the rate cuts fail to prevent a recession, we could witness declines similar to those experienced after the dot-com bubble or the 2008 global financial crisis. The yield on the 10-year Treasury note, which influences mortgage rates and other borrowing costs, has traditionally risen during rate cuts. While this might seem counterintuitive, it reflects market expectations for future rates. The Fed’s actions prior to the 2008 crisis serve as a cautionary tale, where initial expectations of modest cuts shifted to near-zero rates in response to the economic collapse. Small businesses, often with more floating-rate debt than larger corporations, tend to benefit more from rate cuts, as their borrowing costs decrease. This advantage is why the Russell 2000 index of small and medium-sized businesses has frequently outperformed the S&P 500 during rate-cutting cycles. Corporate bonds face additional dynamics: the spread, or risk premium, between corporate and government bonds. A healthy economy typically narrows this spread, balancing the rise in Treasury yields. However, in times of recession, spreads widen as fears of bankruptcy and default increase, mirroring the fallout of the 2008 financial crisis. The U.S. dollar often weakens during a rate-cutting cycle, as lower rates make it less attractive to foreign investors seeking the highest returns. However, this isn’t always the case; in 2001, the dollar strengthened due to investors seeking safety after the September 11 attacks. Gold, traditionally a hedge against inflation, benefits from rate cuts. Lower rates reduce the opportunity cost of holding non-income-generating assets like gold, making it more appealing to investors. Gold’s price, often driven by the dollar’s strength, gains traction when rates fall, particularly when paired with economic uncertainty. As we navigate this rate-cutting cycle, the key question remains: Will these cuts be enough to boost the economy or simply delay an inevitable downturn? #FederalReserve #InterestRates #RateCuts #StockMarket #CorporateBonds #TreasuryYields #SmallBusiness #USDollar #Gold #EconomicUncertainty #Recession https://lnkd.in/e2Uf4eCc

The US Federal Reserve (Fed) announced a cut to the bellwether Fed funds rate by 25 basis points to 4.25%-4.5%, following the last meeting of the Federal Open Market Committee (FOMC) for 2024 with Fed chairman Jerome Powell indicating that this may be the last rate cut for a while. “We can be more cautious going forward, can be more cautious in reducing rates,” says Powell in his speech announcing the rate cut. https://lnkd.in/dUtbju4c

As expected, the Fed opted to cut rates for a third time this year, reducing the range for the Federal Funds target to 4.25-4.50%. At the same time, the Committee signaled a significant reduction in its forecast for additional policy adjustments over the next 24 months as well as an uptick in expectations for inflation and growth. According to the dot plot, most Fed officials see just two rate cuts in 2025, another two cuts in 2026 and one more cut in 2027, resulting in a terminal rate of 3.00%, revised up from 2.875% by 2026 in the September forecast. https://on.ft.com/41HLoMm