Fed cuts jumbo interest rate; futures rise after price decline

Investing.com — The Federal Reserve is making a big move, cutting interest rates by half a percentage point, signaling that there could be more cuts this year. U.S. stock futures rose slightly on Thursday after stocks ended the previous session lower following the announcement and a closely watched news conference with Fed Chairman Jerome Powell. The Bank of England will now announce its latest interest rate decision, followed by the Bank of Japan on Friday.

1. Fed announces massive interest rate cut and signals start of new easing cycle

The U.S. Federal Reserve cut its benchmark interest rate by 50 basis points on Wednesday and indicated it would announce further cuts this year, initiating an easing cycle to support the economy after a long battle with rising inflation.

The Federal Open Market Committee (FOMC) cut its benchmark interest rate to a range of 4.75 to 5.0 percent after more than a year of borrowing costs at more than two-decade highs. The decision was not unanimous, with Fed Governor Michelle Bowman favoring a rate cut of just 25 basis points.

It was the first cut since March 2020. The size of the cut, as well as the updated “dot plot” of officials' forecasts, suggested that policymakers may be trying to curb a potential slowdown in the economy after the period of elevated interest rates.

At a press conference, Fed Chairman Jerome Powell played down fears of a recession, pointing to robust economic growth, easing price increases and a “solid” labor market.

“I don't see anything in the economy right now that suggests the likelihood of a downturn is elevated,” Powell said.[Economic] Growth at a solid level, inflation is falling, you see a labor market that is still at a very solid level, so I don't really see that [recession risk] Now.”

2. Futures point upwards

U.S. stock futures rose slightly on Thursday after closing lower in the previous session amid choppy trading following the Fed's announcement.

By 03:31 ET (07:31 GMT), the contract had gained 62 points, or 1.1%, gained 323 points, or 1.7%, and was up 267 points, or 0.6%.

On Wednesday, stocks on Wall Street rallied after the Fed announced its half-percentage-point rate cut, peaking as Powell held his press conference. The benchmark index briefly broke an intraday record but ultimately closed 16 points, or 0.3 percent, lower. The tech-heavy index also lost 55 points, or 0.3 percent, and the 30-stock index fell 103 points, or 0.3 percent.

“What bears talked about [was that] [t]“The Fed’s rate cut was widely expected and had largely already been priced into equity prices,” Vital Knowledge analysts said in a note to clients.

Elsewhere, the spread between the yield on 2- and 10-year U.S. Treasury bonds, an indicator of future growth forecasts, rose to its highest level since 2022, while the indicator measuring the greenback against a basket of its currency pairs was unchanged.

“Unless employment figures turn out to be significantly better than expected and force the Fed to adopt a more cautious easing stance, the dollar is likely to remain weak until the US election,” ING analysts said in a note.

3. Bank of England decision in focus, Bank of Japan ahead

Traders now turned their attention to the Bank of England as the central bank is set to announce its latest monetary policy decision on Thursday.

The BoE is expected to leave its key interest rate unchanged at 5.0% following its August cut, with policymakers likely to reiterate their “cautious” stance against easing too quickly or too early.

Last month, UK consumer prices stood at 2.2% annualised, close to the Bank's medium-term target, but services inflation is high at 5.6% annualised.

Outside the UK, the Bank of Japan is expected to leave its key interest rates unchanged at the end of its two-day meeting on Friday, although its policymakers could still issue a more hawkish forecast due to expected higher inflation.

4. Gold heals lost gold reserves overnight

Gold prices were slightly higher in early European trading on Thursday, although the yellow metal suffered losses overnight despite some optimism over the Fed's sharp rate cut.

Powell pointed to the prospect of further rate cuts, with markets now pricing in a total of 125 basis points worth of rate cuts by year-end. But he also said the Fed has no intention of returning to an ultra-low interest rate environment like that seen during the COVID-19 pandemic, adding that the so-called neutral rate – which neither encourages nor hinders broader activity – will be much higher than it has been so far.

His comments suggested a more optimistic outlook for medium- to long-term interest rates, dampening recent bullish sentiment toward gold, which had reached record highs ahead of the Fed decision.

However, the prospect of lower interest rates remains a good sign for non-yielding assets such as gold, as it reduces the opportunity cost of investing in gold bullion.

Meanwhile, gains remained limited in Bitcoin, a speculative asset that has seen an uptrend in 2021 due to ultra-low interest rates.

5. Crude oil profits

Crude oil prices rose after the US Federal Reserve's sharp interest rate cut raised hopes of increased economic activity in the world's largest consumer, but concerns about global demand remained.

By 03:30 ET, the contract was up 0.9% at $74.34 a barrel, while futures (WTI) were trading 1.0% higher at $70.58 a barrel.

US government data released on Wednesday showed a larger than expected inventory draw, namely 1.63 million barrels. Although this figure was significantly higher than expected (0.2 million barrels), it also coincided with an increase in distillate and gasoline stocks.