Making a virtue out of necessity is the hallmark of a skilled communicator, and that certainly applies to US Federal Reserve chair Jay Powell after markets seemingly embraced his decision to start the rate-cutting cycle with an unusually large half a percentage point cut on 18 September.

The benchmark S&P 500 index soared to its 33rd new all-time high of the year while the Dow Jones Industrial Average breached 42,000 for the first time ever.

What was also interesting about the market’s reaction was gold touched a new high and the US 30-year Treasury yield moved higher, while shorter-dated yields barely moved.

The yellow metal tends to benefit from a fall in inflation-adjusted interest rates and has also been in demand as tensions in the Middle East escalate.

That said, the move could suggest investors want to protect themselves from higher inflation. The move in the US 30-year Treasury bond yield gives some credence to that possibility.

A reminder inflation has not been quashed is the potential strike by US port workers which could affect 41% of the country’s container port volume leading to shortages and higher prices amid a fresh supply chain crisis.

Chair Powell effectively told the world the jumbo interest rate cut was intended to get ‘ahead of the curve’ and maintain the strength of the labour market.

‘The labour market is in a solid condition, and we want to keep it there; same for economy,’ said Powell in a press conference.

Analyst Orla Norman at Pictet Wealth Management believes this represents a dovish shift in the Fed’s thinking and predicts another half a percentage point cut in November followed by a quarter-point cut in December.

Powell was careful not to declare victory over inflation and cautioned observers not to expect big rate cuts but a gradual recalibration of the Fed’s monetary stance back towards neutrality.

The central bank’s latest set of economic projections show officials believe the neutral rate of interest, where policy neither stimulates nor restricts activity, has moved up slightly to 2.9%.

Fed officials expect two further quarter of a percentage point rate cuts in 2024 and a total of 2.5% of cuts altogether, leaving the Fed Funds rate between 2.75% and 3% in 2026.

Making a bigger-than-expected rate cut without spooking investors is quite a coup. Historically the central bank has only moved by half a percentage point when it is worried about a weakening economy.

One thing remains clear – the battle between bulls and bears of the economy has a few more rounds in it yet. 

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