Wall Street Reacts to ‘Dovish’ First Fed Rate Cut in 4 Years

(Bloomberg) — Traders added to bets on further easing by the Federal Reserve and the dollar ticked lower after the US central bank cut interest rates by a half-point in its first reduction in four years.

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The move brings to an end weeks of speculation about whether the Fed would kick start its easing cycle with a quarter- or half-point cut. Traders were pricing a roughly even chance of each outcome in the immediate run-up to the decision.

“This is not just a 50 basis point cut, this is a dovish 50 basis point cut,” said Mohamed El-Erian, Bloomberg Opinion columnist and president of Queens’ College, University of Cambridge, on Bloomberg Television. “My question is what has changed since July, when they decided not to cut rates, and now there’s this very aggressive cut and aggressive signaling.”

Here’s what others on Wall Street are saying:

Phil Mesman, portfolio manager at Picton Mahoney Asset Management

“A 50 bps cut is a reasonable precaution against a further deterioration in the labor market, given that inflation risks have subsided. Further, the cut is not a too unreasonably aggressive first step as inflation risk appears less problematic.”

Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston

“The fact that the dot plot is not suggesting more 50 bps moves further feeds the narrative that this is a start and proactive, rather than a trend of more 50bps moves and a worrisome economy. It probably also suggests they regret not starting with 25bps at the last meeting.”

Keith Lerner, chief market strategist at Truist Financial:

“We still view this as a market friendly cut and wouldn’t be surprised if stocks move higher as investors digest this news. We think the cut is more about the Fed coming from a very restrictive level, and that inflation has progressed toward their target, and it’s the right move by the Fed.”

Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, US:

“The market goaded the Fed to cut 50bp. While markets may be eager to price in another high probability of a 50bp rate cut, the changes to the statement suggest Fed remains data dependent and could just as easily downshift to 25bp”

Cameron Dawson, CIO at NewEdge Wealth:

“Equities are enjoying this backdrop of a supportive Fed alongside signs of continued resilience in U.S. economic growth. This is a supportive backdrop for broad equities, including cyclical areas, that benefit from stronger growth, and interest-rate-sensitive areas, that benefit from the falling yield environment.”

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Chris Murphy, co-head of derivatives strategy at Susquehanna International Group:

Materials and cyclicals are leading and defensive names are underperforming. I would expect that trend to continue with defensives lagging and cyclicals leading.

Garrett Melson, portfolio strategist at Natixis Advisors LLC:

“With as tight as real rates are and far into restrictive territory they are, it makes sense to front load easing to more quickly return to neutral. A benign 50 sends that message loud and clear and its the signaling that I think is the key for markets. The Powell Put is in play for labor markets and that ultimately supports risk appetite.”

Steve Sosnick, chief strategist at Interactive Brokers LLC:

“Stock markets got what they wanted, at least for now. I find it interesting that ‘balance of risks’ is used twice in the third paragraph, so we might want to find out more about the relative balance is, but the statement certainly is dovish as a whole. Now the question is how much of this has been priced in by a market that was already up for seven straight days prior.”

Helen Given, a foreign-exchange trader at Monex Inc.:

“The yen is obviously a big winner in all this as interest differential is now materially smaller. The dot plot is the bigger story. The Fed still sees less easing this year than traders do, which is why we saw that initial fall in the dollar pared back”

Dave Mazza, CEO at Roundhill Investments:

“The FOMC delivered a 50bps rate cut, which is in line with recent expectations. This cut acknowledges the Fed’s concerns about the employment picture, which should bode well for risk sentiment in the short term. While this action is decidedly dovish, investors will be hanging on Powell’s words in the press conference to gauge the extent of this dovishness, especially considering the inflation picture has improved, but is far from mission accomplished.”

Kevin Gordon, senior investment strategist at Charles Schwab & Co.:

“The most important part is the change in the statement to show how much the labor market is now in focus. It’s clear that Fed members see larger downside risk when it comes to payroll growth, but they also know they have a lot of room to dial back the restrictiveness.”

–With assistance from Natalia Kniazhevich, Carter Johnson, Elena Popina and Geoffrey Morgan.

(Updates with further commentary)

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