The United States Federal Reserve (Fed) delivered exactly what the markets expected: a 0.25% interest rate cut. It is the first cut in the past 12 months and possibly not the last one this year. But the sought-after dovish tone did not arrive as currently the US macroeconomic environment is very peculiar, eToro analyst for Romania, Bogdan Maioreanu.
Last night’s actions were well-telegraphed by Chairman Jerome Powell during his Jackson Hole speech at the end of August. Importantly, there was just one dissenter in the committee, Stephen Miran, who joined the Fed on Tuesday and is on leave as the head of the White House’s Council of Economic Advisers, who asked for a 0.5% rate cut. This shows the group is well-aligned and remains independent from political pressure, calming one of the market’s concerns.
The current macroeconomic environment in the US is complicated. Inflation continues to edge higher, while labor market measures — like payrolls, unemployment, layoffs, and job openings — are moving in the wrong direction. Even the Fed projections still put inflation ending this year at 3%, well above its 2% target, while its projection for economic growth was slightly higher at 1.6% versus 1.4%. On the flip side, unemployment climbed to 4.3% in August and payrolls grew far less than expected. Despite all this, consumers remain resilient and continue to spend, an observation that was echoed on corporate conference calls in the earnings season. This was also confirmed by the recent August retail sales figures that topped expectations. This is why the Fed is still cautious and still trails the data, and maybe this is also a reason why the doves stayed put.
Looking forward, investors will now expect two more cuts in 2025 unless we see a notable disruption in inflation or employment. We’re still a long way from year-end 2026, but the Fed’s current economic projections call for just one rate cut next year. That’s notably different from the market’s current expectation for two to three cuts. However, rate-cut expectations can fluctuate wildly over the long term — and they don’t always have a major impact on markets. Stocks can do quite well even amid elevated rates, as the last several years have shown.
According to the latest eToro Retail Investor Beat survey, in this quarter, 43% of the Romanian retail investors are planning to increase the amounts that they contribute to their portfolios. In terms of assets, 20% of investors are looking to invest in crypto, 16% in foreign equities and 14% in the domestic ones. If we look at sectors, 15% of investors are looking at Technology and Energy and 14% are looking at Financial services.
Historically, rate cuts in non-recessionary environments tend to be a positive catalyst for stocks. While markets could use a breather, it is possible that bulls will line up to buy the dip provided that the American economy avoids a recession and earnings expectations continue edging higher, which would keep the structural integrity of the bull market intact. Specifically, investors may also want to keep an eye on tech, small caps, housing-related stocks, real estate, gold, and Bitcoin.
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