What's going on? Wall Street is betting on the Federal Reserve to "faster and lower" again

Despite some experts warning that the Federal Reserve's bold move to cut interest rates by 50 basis points may bring economic troubles and trigger market sell-offs, Wall Street seems to be in favor of a larger rate cut, with US stocks hitting historic highs again.

Traders are betting that the Federal Reserve will continue its aggressive easing pace. The CME Group's FedWatch tool shows that while the Fed has hinted at cutting rates by 50 basis points at its remaining two meetings in 2024, traders expect a 75 basis point cut.

Some experts point out that it is the cooling of inflation, rather than rising risks of economic recession, that has given the "green light" for the Fed to significantly cut rates again.

Nationwide Mutual's Chief Economist Kathy Bostjancic explains, "If inflation continues to ease, interest rates should be lowered accordingly, the Fed should cut rates by 50 basis points at the next meeting, they are still far from neutral, so a 50 basis point cut does not necessarily mean the economy is collapsing. This indicates that policy has been too tight."

If the past week is any guide, aggressive rate cuts could be a catalyst for the market. Powell emphasized that the Fed's actions should be seen as "a steadfast signal of avoiding falling behind", which is enough to boost investor confidence. The S&P 500 hit its 39th historic high this year, and the Dow Jones Industrial Average broke through 42,000 points.

"The Fed's ability to cut rates by 50 basis points is not because it has to, but because it can, I think this is a very key distinction," pointed out Matt Orton, Chief Market Strategist at Raymond James. "It supports more investment, it supports more capital expenditure, and this is the hidden driver of economic resilience."

Emily Roland of John Hancock points out that investors' optimism for a soft landing is driving "the growth of optimism across the entire market". "Risk assets are celebrating the Fed's ability to avoid a hard landing and taking action positively before more signs of weakness appear in the labor market."

BMO Capital Markets' Chief Investment Strategist Brian Belski raised the year-end target for the S&P 500 to 6,100 points, setting a new high on Wall Street, noting that historical performance patterns "indicate that the market, especially after the Fed shifts to an easing mode, may see stronger trends in the fourth quarter than usual levels".

Next, two key non-farm payroll reports will help the Fed decide on the extent of the next rate cut. Michael Pearce of Oxford Economics warned in a report to clients last Friday that further softening of the labor market could prompt the Fed to cut rates by 50 basis points sooner.

"Given the Fed officials' inclination towards easing, any negative surprises in labor market data could prompt them to cut rates by 50 basis points again in November."