Markets ended the week higher, with the S&P 500 closing at a new record high, following the Fed’s anticipated rate cut on Wednesday. Small caps, which tend to be more interest rate sensitive than large caps, also ended the week higher reaching a new record high for the first time since November 2021.
Despite the rate cut, fixed income markets closed the week lower following an increase in longer-term rates. The move higher, though modest, was reminiscent of interest rate behavior in 2024 when the Fed cut rates by a cumulative 1.0% between September and December and in response, longer-term rates on 10- and 30-Year Treasuries counter-intuitively increased by a similar amount over the ensuing four months. Then as now, the concern for fixed income markets is that lower rates may stoke longer-term inflation, particularly as the Fed’s most recent cut comes at a time when inflation is experiencing upward pressure from tariffs. The weekly rise in longer-term rates may have also been the result of headlines suggesting that Republican and Democratic Congressional leaders are currently at an impasse over a funding bill for the upcoming fiscal year, raising the odds of a government shutdown at the end of the month. Longer-term concerns about fiscal policy was one of the factors cited by Moody’s when the credit ratings agency lowered its US credit rating earlier this year.
Speaking at his post meeting press conference, Powell addressed a number of topics including a) inflation, which he described as “somewhat elevated” vs. the Fed’s 2% target; b) employment, where downside risks have risen and it has become increasingly difficult for job seekers to find work; and c) tariffs which he said have begun to push up prices for some categories of goods but whose overall effects on the economy and inflation remain to be seen.
The Fed also updated their closely watched Summary of Economic Projections (SEP) whose median values suggested two additional rate cuts in 2025 followed by one more in 2026. However, the wide range of projections, particularly for 2026, illustrate the current elevated levels of broader economic uncertainty.
