The jobs picture is no longer “solid”—at least according to the Fed.
Against the backdrop of intense political pressure and shaky labor markets, the Federal Reserve has finally cut interest rates for the first time since Donald Trump was inaugurated.
Investors had been widely expecting a quarter-point (or 25 basis point) cut in the Fed funds rate. They received just that—although some were hoping for a steeper 50 basis point cut.
A majority of Fed officials now anticipate two additional 25 basis point rate cuts over the remainder of this year.
The removal of the adjective “solid” from the Fed’s description of labor market conditions also caught the market’s attention—suggesting the possibility that rising unemployment could spur the Fed to become even more aggressive.
The rate cut was anticipated, so stock and bond market reaction was mild and mixed.
The S&P 500 traded up slightly after the Fed announcement, with a more pronounced move among small-cap stocks, but closed down about 0.1%.
Both short-term and long-term Treasury yields were mixed as well. Yields on 10-Year Treasuries did initially fall below 4% for the first time since last October.
As markets digest today’s decision and subsequent commentary by Fed Chair Jerome Powell, we see a Federal Reserve that is progressively moving in the direction of further rate cuts and easier monetary policy.
In our view, the key thing for long-term investors to appreciate is that the Fed is being reshaped under Trump. This likely means a bias towards lower rates, easier monetary policy in general, and greater tolerance for U.S. dollar weakness.
Powell will likely remain Chair until his terms ends next May, but in the meantime Trump just got one of his top economists, Stephen Miran, confirmed as interim Fed Governor.
Miran was alone among the Governors in voting for a 50 basis point cut.
Meanwhile, the legal case against Lisa Cook, a Biden-appointed Fed Governor who Trump is attempting to fire, moves forward. If Trump is successful, he will have another opportunity to name a Governor of his choice.
It will not be long before Trump gets to name a replacement for Powell. His successor’s thoughts on interest rates and monetary policy will likely be made known and start influencing markets before he or she even begins.
While a more dovish Fed could mean somewhat higher rates of inflation in the future, we see this scenario as positive for investors in stocks, gold and Bitcoin, which have already been reacting well since Powell’s big pivot on interest rates in August.
Gold leads the way
Today’s rate cut is the first since Powell signaled a pivot towards easier monetary policy at the Fed’s annual symposium at Jackson Hole on August 22.
This shift has been a tailwind for risk assets like stocks, gold and Bitcoin—all of which benefit from lower rates and increased financial market liquidity.
After languishing for several months, following an extremely strong start to the year, the gold price has set new highs above $3,700 per ounce, advancing more than 10% since Powell’s Jackson Hole speech.
We outlined this favorable scenario for gold in early September (Pressure on Fed Reignites Demand for Gold).
Gold has led the way, but stocks and Bitcoin have had momentum as well, with the S&P 500 and Bitcoin moving up more than 4% from the day before Jackson Hole through yesterday.
