A 50 basis point rate cut has arrived, but the market did not soar. What happened?

The Federal Reserve made a significant 50 basis point rate cut and opened a new round of easing with a super-dovish dot plot. However, the market's celebration didn't last long, as a major reversal unfolded under Powell's hawkish remarks.

Overnight, after the Fed announced the rate cut, the three major U.S. stock indexes surged, with the Nasdaq rising over 1%, the S&P 500 hitting a new all-time high, and small-cap stocks soaring nearly 2.5%. U.S. bonds rallied, with yields collectively declining.

But after Powell's speech, everything started to reverse, with all stock indexes beginning to fall. By the end of the overnight session, all three major U.S. stock indexes closed lower, and the small-cap Russell 2000 index gave back almost all its gains, closing slightly up by 0.04%.

The U.S. dollar index plummeted in the FOMC statement but rebounded steadily during Powell's speech. U.S. bond yields rose in sync, with long-term yields increasing by 7 basis points that day.

Gold prices surged to a record $2600, then retreated during Powell's speech...

What Happened?

During the press conference, Powell stated that the Fed was just "moderately adjusting its policy stance," without a predetermined policy path, and would continue to make decisions based on economic data at each meeting. The pace of future rate cuts could be fast, slow, or even paused.

Powell's intention was to dispel the market's aggressive bets on "a significant 50 basis point rate cut becoming the new norm," as he pointed out:

"No one should see a 50 basis point rate cut and think this is a new pace."

Furthermore, Powell emphasized that the neutral interest rate may be much higher than before—but it is unknown where this level is.

Powell's remarks poured cold water on the market's aggressive rate cut expectations. The U.S. bond market not only digested the significant rate cut overnight but also priced in future aggressive rate cuts, with the 2-year U.S. bond yield falling significantly from over 5% at the end of April to around 3.6%.

BlackRock portfolio manager Jeffrey Rosenberg, in an interview with Bloomberg TV, said, "Relative to bond expectations, (Powell's comments) are somewhat disappointing."

Citadel Securities' global head of rates trading, Michael de Pass, also stated, "Given the volatility in the bond market over the past six weeks or so, Powell has always found it difficult to 'outperform' the bond market."

What the Market Is More Concerned About Is What Will Happen Next?

Powell's speech has also raised concerns in the market about the uncertainty of future policies.

Since the outbreak of the epidemic and the surge in inflation, traders have been struggling to predict the direction of the Federal Reserve. The Fed's "data-dependent" decision-making approach means that even if the Fed starts cutting interest rates, the magnitude of future rate cuts is difficult to predict.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, told the Financial Times that a more enduring and predictable easing cycle is on the horizon, "It will now be a battle between market expectations and the Fed, with employment data determining which side is correct."

Some also believe that the market decline is due to concerns about the economy triggered by significant interest rate cuts.

However, Gargi Chaudhuri, Chief Investment Officer and Portfolio Strategist for BlackRock Americas, believes that the slight decline in the stock market on Wednesday is more a reflection of investors taking profits before the arrival of a seasonal soft period, rather than new concerns about the economic outlook:

"I wouldn't be surprised to see a pullback in the stock market in the coming weeks, but that's only because we've been performing so strongly up to this point."