The Federal Open Market Committee (FOMC) meeting aligned with market expectations for less aggressive monetary policy, providing strong support for the 2024 market upside: the expectation of lower interest rates.
According to the latest analysis from Sevens Research, Federal Reserve Chair Jerome Powell strongly indicated that a September interest rate cut is likely and suggested the possibility of “some” interest rate cuts in 2024, which leading to a noticeable increase in market values.
Market reactions were immediate, with Fed funds futures now showing forecasts for three interest rate cuts in 2024, specifically cuts of 0.25 percentage points in September, November and December.
Sevens Research pointed out, “As is often the case with market responses to Federal Reserve announcements, the Federal Reserve gives a small signal and investors quickly respond to larger action.” This behavior caused the and the equally weighted S&P 500 ETF (RSP) to reach their highest values to date.
The company believes that the short-term implications for the market of expected lower interest rates are positive. Sevens Research noted that investor expectations of further interest rate cuts triggered an automatic stock-buying reaction, which contributed to the recent rise in market values.
Analysts predict that if economic indicators and corporate earnings reports remain consistent, the S&P 500 (SPY) will soon reach new record highs.
However, Sevens Research warned that while the market is alert to Powell’s message of less aggressive monetary policy, it is important to understand the reasons for lower interest rates.
The agency said Powell expressed growing concern about the economic expansion, particularly the labor market, which he described as subject to “significant risks.” This concern refers to a potential “economic growth concern” if the labor market weakens.
Sevens Research summarizes the situation: “The Federal Reserve clearly indicated that it intends to cut interest rates in September Powell also hinted at some interest rate cuts in 2024. Why not because inflation is so low that it can cut rates aggressively. but because he’s worried about expanding the economy.”
The Sevens say the critical question for markets in the second half of 2024 is whether the Federal Reserve will cut interest rates in time to avoid an economic slowdown.
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