What the FOMC Decision Means for Markets

The recent Federal Open Market Committee (FOMC) meeting confirmed dovish expectations, bolstering significant support for a market rally in 2024, driven by the anticipation of rate cuts.

According to a note from Sevens Research, Federal Reserve Chair Jerome Powell “almost indicated that a rate cut in September is forthcoming” and mentioned the possibility of “multiple” rate cuts in 2024, spurring a notable market rally.

Market reactions were immediate, with futures now anticipating three rate cuts in 2024, specifically reductions of 25 basis points in September, November, and December. Sevens Research remarked that “as often occurs with market reactions to Fed statements, the Fed provides investors a small indication, and they swiftly take much more.” This led to the equal-weighted S&P 500 ETF reaching new all-time highs.

The firm believes that the short-term implications of these expected rate cuts are favorable for the market. Sevens Research noted that investor expectations for further rate cuts “trigger a conditioned response in investors to buy stocks,” which has contributed to the recent rally. Analysts suggest that if economic data and earnings hold steady, the S&P 500 could soon hit new all-time highs.

However, Sevens Research warns that while the market is focused on Powell’s dovish signals, it’s essential to consider the reasons behind these potential rate cuts. Powell expressed increasing concern about economic growth, particularly regarding the labor market, which he described as facing “real risks.” This concern points to a possible “growth scare” if the labor market weakens.

Sevens summarized the current situation, stating, “The Fed is clearly signaling that they will cut rates in September and has hinted at several reductions in 2024. But why? It’s not because inflation is low enough to justify aggressive cuts; it’s because they are increasingly worried about growth.”

The critical question for the market as 2024 progresses is whether the Fed will implement rate cuts in time to avert an economic slowdown.