The Fed cuts interest rates, the "shoe" lands smoothly, but troubles may still lie ahead

"I don't think this calm will last," said Brian Jacobsen, Chief Economist at Annex Wealth Management, managing $5.5 billion in assets. He pointed out that the reversal of the US stock market later in the day could set the stage for market weakness, "unless we get some data that gives the market a clear sense of direction."

"The Fed is clearly playing catch-up and trying to make up for lost time with the recent rate cut," Jacobsen said.

As the Fed's decision ripples through other markets, it may also trigger chain reactions.

Karl Schamotta, Chief Market Strategist at Corpay, discussing the foreign exchange market, said, "The next few hours could be dangerous... As expectations for interest rates in other economies strengthen, traders may be exposed to sudden volatility." Additionally, "with adjustments related to positions taking effect, aftershocks are likely to continue."

Mild Market Reaction

Data from options analysis service ORATS shows that the price of stock options pricing the S&P 500 Index fluctuated by about 1.1%. However, as of Wednesday's close, the index ended a 7-day winning streak, closing down 0.29%, reversing earlier gains.

Sonu Varghese, Global Macro Strategist at Carson Group, stated that one reason for the subdued market reaction near the close is related to the movement of asset prices in the days leading up to the Fed decision. As of Tuesday, the Russell 2000 Index had risen 5% over the past five trading days, and the US dollar had fallen by 0.7%, as the market anticipated the long-awaited Fed rate cut cycle to begin.

Matt Diczok, Head of Fixed Income Strategy at Merrill Lynch and Bank of America Private Bank, said, " 'Buy the rumor, sell the fact' is a cliché, but it's true."

On Wednesday, the US Dollar Index initially fell but later rebounded, rising 0.1% to 100.98 at one point.

Jack McIntyre, Portfolio Manager at Brandywine Global, said, "As the policy moves of the Fed rate cut have been largely digested, financial markets have not experienced significant volatility."

However, there were significant changes in the bond market, with the 10-year US Treasury yield soaring by 7 basis points that day, and the 2/10-year US Treasury yield curve reaching its highest level since July 2022 after the rate cut, indicating expectations for long-term inflation and economic growth to rise.

Contrary to the days leading up to the Fed's rate decision, US Treasury yields, inversely related to prices, had fallen to their lowest levels since mid-2023.

In a research report, Julian Emanuel, Senior Managing Director at Evercore ISI, suggested being prepared for a rebound in US Treasury yields, and that **the Fed's progress on inflation may slow or stall In the stock market, initially rebounding small-cap stocks eventually closed flat. According to data from LSEG, the Russell 2000 Index, which is mainly composed of small-cap stocks, rose nearly 1% within one minute after the Federal Reserve's decision, marking its largest single-minute percentage increase in at least three months.

Investors tend to favor small-cap stocks after the Fed cuts interest rates because smaller companies typically rely more on borrowing, and lower rates reduce their financing costs, thereby enhancing their profitability and growth.

Ryan Detrick, Chief Market Strategist at Carson Group, stated, "The surge in small-cap stocks particularly indicates that the market agrees with the Fed's statement that they will continue to cut rates next year, which could be beneficial for small-cap stocks."

However, the Russell 2000 Index only closed up 0.04% that day.

Federal Reserve Chairman Powell stated during the meeting that the rate cut marks a "strong start to protecting economic strength." Nevertheless, a significantly large rate cut may raise concerns.

Matthew Rowe, Head of Portfolio Management and Cross-Asset Strategy at Nomura Capital Management, said, "I do believe that investors will take profits, and the stock market may decline as the market continues to question what is making the Fed fearful, something we cannot see."