Why is Wall Street heading for further rate cuts in Q4?

The bulls are back and investors are chasing the market higher.

Last week I wrote about why a 50 basis point rate cut might be a mistake, with experts telling me that the Fed’s bold move could be a bad omen for the economy and could trigger a market sell-off.

However, one week later, Wall Street appears to be heading toward further rate cuts, with stocks jumping to record highs.

Traders are betting that the Fed will continue its aggressive easing pace. While the central bank has signaled another 50 basis point cut across its two remaining meetings in 2024, traders are pricing in an additional 75 basis points, according to CME Group’s FedWatch tool.

Experts tell me it’s slowing inflation, not a growing recession risk, that will give the Fed the green light for another big rate cut. Rates fell to a three-year low in August.

“if [inflation] “While monetary policy continues to be accommodative, interest rates should be cut in line with that,” said Kathy Bostjancic, chief economist at Nationwide Mutual.

“The Fed should raise interest rates by 50 basis points over the next year.” [meeting]“They are far from neutral, so a 50 basis point cut is not necessarily a sign of economic collapse. It is an admission that policy is too restrictive,” Bostjancic added.

The Fed is scheduled to issue its next interest rate decision on November 7, and will have another chance to cut rates at its December meeting.

If last week is any guide, the sharp cut could be a catalyst for the market. Powell’s assertion that the Fed’s move should be seen as “a sign of our commitment not to be left behind” was enough to boost investor confidence. The S&P 500 (^GSPC) hit a new all-time high of 39, while the Dow Jones Industrial Average (^DJI) rose above 42,000.

“The Fed was able to cut rates by 50 basis points not because it had to but because it was able to, and I think that’s a really important distinction,” Matt Orton, chief market strategist at Raymond James, said on Yahoo Finance’s “Morning Brief.”

“It supports more investment, it supports more capital spending, and that’s what’s been behind a lot of the economic resilience.”

Emily Rowland of John Hancock told me that the growing optimism about a soft landing is leading to “a lot of optimism in the markets.”

“The riskier assets are really celebrating this idea that the Fed can avoid a hard landing, and do it preemptively before we see more weakness here in the labor market,” Rowland said.

BMO Capital Markets chief investment strategist Brian Belsky raised his year-end price target for the S&P 500 to a Street-high 6,100, noting that historical performance patterns “suggest a stronger-than-usual fourth quarter for the market, especially since the Fed shifted to dovish mode.”

The story continues

Two key jobs reports will help guide the Fed on the size of its next rate cut. In a note to clients on Friday, Michael Pearce of Oxford Economics warned that further weakness in the labor market could prompt the Fed to cut by 50 basis points sooner rather than later.

“Given the shift toward dovish bias from Fed officials, any negative surprises in labor market data could prompt them to deliver another 50bp cut in November,” Pierce wrote.

Senna Smith He is a host on Yahoo Finance. Follow Smith on Twitter @sinansmithDo you have advice on deals, mergers, activist positions or anything else? Email seanasmith@yahooinc.com.

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