On Wednesday, the SPDR S&P 500 ETF Trust (NYSE:ASX:) faced a shift in outlook following a narrative from the Federal Reserve’s Beige Book, which influenced the Federal Reserve’s decision to adjust interest rates. An analyst noted the surprising move by the Fed to cut rates amidst economic indicators that would typically argue against such action.
The economy is currently growing at a rate of 2.5-3%, with equities at record highs, inflation above target, and unemployment at a low of 4.2%, with no apparent financial system stress as seen in 2007.
The recent Federal Reserve Beige Book, an anecdotal survey on the state of the economy, showed that only three of the 12 Federal Reserve Bank districts reported growth over the past eight weeks, compared to seven during the previous report in July.
This decline, along with corroborating weakness in ISM and NFIB business surveys, prompted the Fed to shift policy from restrictive to a more neutral stance rapidly.
The analyst’s forecasts align with the Fed’s indications to lower rates to 3.5% or slightly below by next summer. This proactive approach aims to help the US economy avoid a recession, similar to the mid-1990s strategy under Alan Greenspan. However, the analyst acknowledges growing concerns over the job market outlook and the possibility that the Fed may need to implement rate cuts more aggressively and swiftly.
The Fed’s stance is that a 3% rate is not considered stimulative, which means if the growth narrative weakens further, the Fed is expected to reduce rates even more. The analyst emphasizes the importance of the Fed’s readiness to act in response to any significant downturn in economic growth.
In other recent news, the Federal Reserve is under scrutiny regarding potential policy changes. The central bank’s Chairman, Jerome Powell, recently signaled support for proposed changes to the capital regime, with completion expected in the first half of next year. Simultaneously, financial institutions and analysts, including Citi, Goldman Sachs, and Wells Fargo, are predicting a series of interest rate cuts.
Citi economists, in analyzing recent retail sales data, suggested a 25 basis point reduction at the Fed’s meeting and foresee a total of 125 basis points in rate cuts for the year due to anticipated labor market softness. Meanwhile, Evercore ISI reiterated its belief that a 50 basis point cut is appropriate, amid increased market expectations for a significant Federal Reserve interest rate cut.
In addition, Citi analysts project that Federal Reserve Chair Jerome Powell may communicate the possibility of larger cuts in the future. These recent developments reflect the financial market’s anticipation of the Federal Reserve’s decision on interest rates.
The upcoming Federal Reserve statement and press conference are expected to provide further clarity on the trajectory of monetary policy in the face of evolving economic challenges.
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Read More: SPDR S&P 500 ETF Trust outlook dims on Fed rate cut narrative By Investing.com