Stock market today: Federal Reserve cuts interest rates by half a percentage point, stocks rise

I was taught long ago to not put a ton of stock in the moments after a Fed meeting — what happens in markets could easily change the following day as investors digest the news flow.

I think this is an important lesson to keep in mind today as the markets pop on a surprise 50 basis point rate cut from the Fed. And make no mistake, this was a surprise to a Street bracing for 25 basis points. There wasn't really a hint of this in Nick Timiraos' pre Fed column, either.

By tonight, you could be hearing people voice concern on why the Fed cut so aggressively — what do they know about the economy that we don't?

Until then, this take from economist Chris Rupkey I think is nicely level-headed:

"Markets got the 50 bps they wanted and now are soaring to new highs but some investors might be nervous and wondering what the Fed sees and they do not. The last two times the Fed cut interest rates the first time they did it by 50 bps as well, but it was an emergency inter-meeting cut because the outlook had darkened. There were recessions in fact. This time there is little to fear in the economic outlook… we hope."

Wed, September 18, 2024 at 7:26 PM GMT+1

The Federal Reserve signaled Wednesday it would lower interest rates two more times this year after it slashed its benchmark federal funds rateby 50 basis points to a range of 4.75%-5.0% at the conclusion of its meeting on Wednesday.

Fed officials see the fed funds rate coming down to 4.4% in 2024. That suggests the Fed will cut rates by an additional 0.50% later this year. Outside of Wednesday's jumbo 50 basis point cut, the Fed has moved in 25-basis-point increments over the last year or so, indicating the central bank expects to cut interest rates two more times in 2024. The previous June projection had interest rates peaking at 5.1%.

Along with its policy announcement, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its "dot plot," which maps out policymakers' expectations for where interest rates could be headed in the future.

In total, 17 officials predicted further easing this year with just two seeing rates holding steady through the remainder of the year. Seven officials estimate just one more cut, while nine officials see two additional cuts. One official predicts three cuts to come by the end of the year.

Next year, the majority of officials see the fed funds rate hitting 3.4%, lower than the 4.1% anticipated in its prior forecast. That suggests four additional rate cuts to come in 2025. Officials see two more cuts from there in 2026, which would bring the fed funds rate down to 2.9%.

The updated projections suggest the Federal Reserve has begun its long-awaited easing cycle as the central bank attempts to maneuver a soft landing of the economy, in which price increases stabilize while employment remains robust.

So far this year, inflation has moderated but remains above the Federal Reserve's 2% target on an annual basis, pressured by hotter-than-expected readings on monthly "core" prices in recent months.

The job market has also been a particular focus for the Fed after the unemployment rate unexpectedly ticked up to 4.3% in July. It's since come down to 4.2% as FOMC members debate whether or not recent labor market softness indicates the market is gradually cooling or quickly weakening.

Read more here.

Wed, September 18, 2024 at 7:05 PM GMT+1

Wed, September 18, 2024 at 6:41 PM GMT+1

About 20 minutes before the Fed's highly anticipated interest rate decision, stocks are slightly higher.

The tech-heavy Nasdaq Composite (^IXIC), the S&P 500 (^GSPC), and the Dow Jones Industrial Average (^DJI) were all up about 0.1%.

Meanwhile, the 10-year Treasury yield (^TNX) was sitting at 3.68%, up about three basis points on the day.

Wed, September 18, 2024 at 6:19 PM GMT+1

Real estate stocks could extend their rally, assuming the Fed makes its first interest rate cut in four years. However, the size of the rate cut matters, according to one portfolio manager.

“The market will respond more favorably to a larger cut, and we could see real estate stocks rally in a bigger way than if there is a 25 bps rate cut,” Todd Kellenberger, Principal Asset Management’s REIT client portfolio manager, told Yahoo Finance in an email.

Ahead of the Fed's policy decision announcement, investors were placing the probability of a 50-point cut at 59%, according to CME's FedWatch tool.

The Real Estate Select Sector SPDR Fund (XLRE) — whose top holdings include REITs like Prologis (PLD) and American Tower (AMT) — is up 17% this quarter. This is a surprising turnaround from the start of this year, as the sector suffered from elevated borrowing costs. Mortgage rates have moved lower since then.

Kellenberger remains bullish on the landscape for REITs once the path for the Fed’s plan becomes even clearer.

“We believe the more important thing to watch is the Fed’s commitment to future rate cuts,” Kellenberger added. “A strong commitment to cutting rates in the future will be important to sustain a rally in REIT stocks in the near term. Market sentiment will likely favor interest rate-sensitive areas of the market like REITs.”

Wed, September 18, 2024 at 6:00 PM GMT+1

The big debate entering 2 p.m. ET is whether the Fed will opt for a 25 basis point interest rate cut or a 50 basis point interest cut.

But some economists have pointed out that the more important part of today's news will be what the central bank signals about its plan for interest rate cuts over the next year.

"Whether it's 50 basis points or 25 basis points, as long as the Fed signals that they expect to make substantial further cuts into 2025, I think that will provide the reassurance that financial markets and the economy more broadly needs that those interest rate sensitive sectors can rebound next year," Comerica Bank chief economist Bill Adams told Yahoo Finance.

Entering Wednesday's press conference, markets are pricing in roughly 100 basis points of easing through the end of 2024 and nearly 250, or almost ten 25 basis point cuts, by the end of 2025.

Wed, September 18, 2024 at 5:15 PM GMT+1

The S&P 500 (^GSPC) is trading around 5,630 on Wednesday, within striking distance of its record close from July of 5,667.20 as markets await the first interest rate cut from the Federal Reserve since 2020.

According to research from Carson Group chief market strategist Ryan Detrick, this is typically a good sign for stocks. Going back in history, Detrick's work shows that during the 20 times the Fed has cut rates with the benchmark index near a record high, the S&P 500 has been higher a year later.

Wed, September 18, 2024 at 4:45 PM GMT+1

As we noted earlier this week in the Yahoo Finance Morning Brief, markets have moved dramatically in the past week to price in a 50 basis point interest rate cut.

And now that the market predicts the larger cut, the real surprise for investors could be if the Fed opts for the smaller cut. With a long break between today and the Fed's next scheduled policy decision on Nov. 7, not slashing rates could raise uncertainty in the market, George Cipolloni, portfolio manager at Penn Mutual Asset Management, told Yahoo Finance.

This would notably leave the Fed on the sidelines to watch two labor reports, which could shake the market if they reveal signs of growing weakness and make the Fed appear behind the curve.

"It's going to be a very uncertain period," Cipolloni said. "And I do think we have a gap potentially for volatility here if the market gets disappointed with 25 basis points."

Wed, September 18, 2024 at 4:00 PM GMT+1

The Nasdaq Composite (^IXIC) was the best performer of the major indexes on Wednesday, rising more than 0.2% at around 11 a.m. ET.

A bounce-back in Apple shares helped lead the charge. The stock rose more than 2% early Wednesday morning after falling earlier this week on reportsof weak demand for the newly launched iPhone 16.

Apple has nearly erased all of its losses from earlier this week.

Wed, September 18, 2024 at 3:15 PM GMT+1

Stocks are quiet on Wednesday morning. But recent history tells us that's to be expected on a day when the market is waiting for a Fed decision and press conference from Chair Powell.

A chart from Bespoke Investment Group shows most of the trading action on Fed days comes after Powell begins his press conference at around 2:30 p.m. ET.

During the past 10 Powell pressers (shown in red), stocks have rallied before eventually giving back a large portion of their gains and closing below the highs of the day.

Wed, September 18, 2024 at 2:32 PM GMT+1

Stocks were little changed at the open on Wednesday as investors patiently await the Federal Reserve's next monetary policy decision at 2 p.m. ET.

As debate swirls about whether the Fed will cut interest rates by 25 or 50 basis points, the three major indexes appeared to be in wait-and-see mode.

Wed, September 18, 2024 at 1:57 PM GMT+1

New residential construction increased in August as mortgage rates continued their decline.

Housing starts rose 9.6% from the previous month to a seasonally adjusted annual pace of 1.356 million units, according to data from the Census Bureau released Wednesday. Single-family housing starts soared 15.8% to a seasonally adjusted annual pace of 992,000.

The data comes as homebuilders feel more confident about the housing market. Mortgage rates are at theirlowest level in over a year. Rates have been on a downward trend recently, with investors expecting the Fed to announce an interest rate cut at the conclusion of its policy meeting later Wednesday.

The data showed that building permits for single-family homes rose to a pace of 967,000, a 2.8% increase from July’s revised figure of 941,000. Meanwhile, permits for multifamily homes came in at a rate of 451,000 in August.

Wed, September 18, 2024 at 1:52 PM GMT+1

JPMorgan Chase (JPM) CEO Jamie Dimon told a conference on Tuesday that any interest rate move by the Fed would “not going to be earth-shattering," arguing that "it’s a minor thing when the Fed’s raising rates and lowering rates because underneath that there’s a real economy.”

The comments follow Dimon telling CNBC last month that when it comes to the debate about how much the Fed cuts interest rates, "I don’t think it matters as much as other people think. You know, the rate effect itself isn’t that critical."

Wed, September 18, 2024 at 1:45 PM GMT+1

From Yahoo Finance's Jennifer Schonberger:

"The Federal Reserve is widely expected to cut interest rates for the first time in four years Wednesday and outline the path for future rate cuts.

Investors have been hoping for a larger half-percentage-point cut versus a quarter-point cut. Traders, in recent days, have increased their wager that the central bank will cut by a deeper 50 basis points. Wednesday morning, fed funds futures were pricing in a better than 60% chance the Fed cuts by 50 basis points, up from just 15% odds a week ago.

'The Fed cutting by 50 basis points is a real possibility,' said Wilmer Stith, a bond trader for Wilmington Trust, who just last week thought it was more likely the central bank could cut by 25 basis points. He’s on the fence, though, as to whether it actually happens."

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