Rate cut breakdown: What you need to know now

It finally happened.

Excitement, eagerness and maybe a bit of anxiety are emotions that come with the territory of a highly anticipated event. But today we are not talking about weddings, championship games or big birthdays. No, in this week’s Top Market Takeaways we are covering the need to know from one of the most anticipated economic events of the last few years: The Federal Reserve finally cut interest rates. (After 420 days without a move, but who’s counting?) It was certainly exciting, at least to us.

On Wednesday, the Fed cut its policy rate by 50 basis points (bps) to 4.75%–5.0% from 5.25%–5.5%. Immediately following the announcement, stocks made an intra-day all-time high, and the S&P 500 closed at its 39th all-time high of 2024 (and first since mid-July). The index is up 20% since the start of the year.

While the interest rate cut matters for deposit and savings accounts, short-term certificates of deposit and money market yields, bond markets were already expecting a big shift in policy. This means that even though the Fed has officially kicked off the rate-cutting cycle, you may not see much movement in places such as mortgage rates. Indeed, mortgage rates have already declined by ~100 bps from their year-to-date highs. Further, 10-year Treasury bond yields have actually moved higher over the course of the week.

When it was all said and done, the Fed remained the focus of the week. Read on to get the skinny on what happened, what we can learn from rate-cutting cycles of the past, and what it all could mean for your portfolio.

The Powell pivot

1. What happened at the September Federal Open Market Committee (FOMC) meeting? The Fed changed its policy stance to ensure that the economic cycle will continue.

A 50-basis-point move sends a clear message that the Fed wants to support growth. But a bigger move should not be taken as a sign of bigger problems in the economy.

Powell said it himself in his news conference, explaining that this policy pivot is a “recalibration.” In other words, the decision to cut interest rates is a normalization of monetary policy from a restrictive level, and not an urgent shift to combat a crisis.

Powell continued: “The U.S. economy is in good shape....It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”

We agree. We are focused on the path of monetary policy from here, taking the risks in context.

Despite some stabilization, the recent slowing in the labor market now stands as a bigger risk than inflation. The unemployment rate is still low at 4.2%, but that is up from 3.7% at the start of the year. In the Summary of Economic Projections (SEP) released last week, Fed officials forecasted unemployment to move up slightly to 4.4% in the fourth quarter of 2024—and remain there through the end of 2025.

Rate cuts stand to oxygenate the economy and support the labor market. They are designed to ensure this economic cycle continues. The median FOMC participant is penciling in 50 bps of further cuts across the remaining two meetings this year. We are aligned with that view.

2. What can we learn from history about cutting cycles?

• The Fed could deliver a lot of rate cuts. We think the Fed is likely to achieve a soft landing. The average soft landing cutting cycle over the past 53 years has seen ~200 bps of easing, but in the “modern” era, it has only been 75 bps. This cutting cycle, if it meets expectations of another 200 bps of easing through 2025, will be the deepest “soft landing” cutting cycle since 1984–1986.
• Today’s labor market is in line with past cutting cycles. Over the last seven cutting cycles, the median three-month moving average number of jobs added to the economy was 116,000 per month. Where does that metric stand today? The same—116,000 jobs added per month. Undoubtedly, the labor market is slowing, but easier monetary policy should support labor markets before a more aggressive slowdown in growth hits the economy.
• Stocks and bonds tend to do well.
  • Stocks: Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates without a recession (1985, 1989, 1995, 1998, 2019). The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. The market was higher one year later all 12 times (with a median return of 15%).
  • Bonds: Since 1970, high-quality bonds have outperformed cash by an average of 10% in cutting cycles.
• But above all, cutting cycles hurt cash. If there is one thing we can learn from past rate-cutting cycles, it’s that cash is likely to underperform as yields fall. In all but two of the last 12 cutting cycles, bonds have outperformed cash.

3. What could it mean for your portfolio? We do not think the start of the easing cycles means that you have missed “it.” Instead, we encourage investors to use the rate-cutting cycle to their advantage—starting with assessing outsized cash positions.

Cash is a necessary part of any lifestyle. Many think of cash as a safe haven or even a source of income when interest rates are high. But cash isn’t designed to beat inflation or produce long-term returns. Even if policy rates settle in a higher range than the last cycle, today’s elevated cash yields won’t last forever.

We believe better opportunities outside of cash exist today, especially for long-term investors looking to grow and compound their wealth over time. Bonds, for example, may provide consistent income and downside protection, while equities may stand to provide long-term capital appreciation.

Your J.P. Morgan team is here to help.

All market and economic data as of September 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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Index Definitions:

• The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
  
• The Bloomberg US Corporate Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
  
• The Bloomberg US Government Bond Index comprised of the US Treasury and US Agency Indices. The index includes USD denominated, fixed-rate, nominal US Treasuries and US agency debentures (securities issued by US government owned or government sponsored entities, and debt explicitly guaranteed by the US government).
  
• The ICE BofA 3 Month U.S. Treasury Index measures the performance of a single issue of outstanding treasury bill which matures closest to, but not beyond, three months from the rebalancing date.