Blog: Fed Signals "All Clear," But for Markets?
Is a large Fed cut good news?
Last week, the Fed cut the Fed Funds rate by 50 bps, which was on the high end of estimates. The market reaction was an advance to new highs. But the question is, what did this larger cut mean?
In Star Wars (1978), Han Solo told Luke Skywalker he was "all clear" to blow up the Death Star because he had removed Darth Vader as a threat. The market reacted as if the Fed said the same thing. The market was "all clear" to keep advancing because the Fed had neutralized the inflation threat. That meant the economy and the markets could keep advancing.
In 2022 the Fed started the tightening cycle with larger than average rate hikes. The intention was to "front load" rates to attack inflation, a tacit admission that they were late in acting. Does this larger cut mean the same thing in reverse? If so, the "all clear" interpretation by the markets could be overdone if there are other less positive outcomes.