Stock markets react to cautious Fed interest rate cuts: Evaluation of current market responses
The Federal Reserve's decision to cut interest rates by 25 basis points on September 17, 2025, was not a surprise, but the cautious move and conservative forecast have split investors into two camps.
Armina Rosenberg, co-founder and portfolio manager at Minotaur Capital in Sydney, stated that the market's reaction to the rate cut was far from clear. The Fed's rate cut, while expected, was not a confirmation of its expected future policy of significantly lower rates.
The Federal Reserve's decision left the door open for further action, with policymakers now expecting two additional 25 basis point cuts this year, one more than projected in June. Mark Cranfield, MLIV strategist, called for a 50 basis point cut this week, potentially accelerating the rate-cutting process into next year. However, Fed chair, Powell, indicated that he would not abandon his cautious approach, as he still sees inflation risks as too high.
The rate cut was met with a mixed response from the stock market. A global stock index reached a new high this week, with investors pricing in a 25 basis point cut ahead of the Fed meeting. The S&P 500 and Nasdaq 100 futures rose after the rate cut, while US indices closed mixed on Wednesday. The German DAX showed weakness after the rate cut.
Oil prices fell following the rate cut and an increase in US fuel stocks. Gold and silver retreated after their recent rally. The US dollar's temporary respite may not last, as Fed members may adopt a more dovish tone next week.
The lone dissenting vote in the Fed's decision to lower the target range for the federal funds rate came from Stephen Moore, a close ally of Donald Trump. Bond traders had bet on the Fed intervening with a series of aggressive rate cuts to prevent a slowdown in the US economy, but Powell contradicted this expectation.
Investors and the Fed are now data-dependent again. Powell pointed to increasing signs of weakness in the labor market to explain the rate cut. The Fed's cautious approach may be influenced by Stephen Mirabelli's call for a 50 basis point cut, which could sway other Fed members towards similar calls.
Andrew Jackson, head of Japanese equity strategy at Ortus Advisors, stated that stock markets will continue to focus on upside potential in technology and AI. The Fed's rate cut may provide a temporary boost to these sectors, but the long-term outlook remains uncertain.
In conclusion, the Fed's rate cut has sparked a mix of reactions from investors, with some seeing it as a positive step towards preventing a potential economic slowdown, while others are more cautious, viewing it as a sign of underlying economic weakness. The coming months will be critical in determining the impact of the Fed's rate cuts on the economy and the stock market.
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