Wall Street strategists weigh in after Powell's power move

The Federal Reserve made the cut heard round the world yesterday, lowering the Fed Funds rate by 50 basis points. And while the incision itself was widely expected, the size of Fed Chairman Jerome Powell’s “recalibration” took a number of market watchers by surprise.

The stock market initially knee-jerked higher on the announcement of the Fed’s first interest rate reduction since 2020 before finishing Wednesday’s session slightly lower. Then, after not even a full day’s reflection, stocks reversed direction again, skyrocketing higher Thursday with investors strapping on risk once again, fully confident in the full faith and credit of the Fed put below them.

As market players were gobbling up stocks, Wall Street strategists were offering their spins on the Fed’s latest maneuver and its potential impact going forward.

Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the BlackRock global allocation investment team, said the 50 basis point cut, which brought the Fed Funds rate to 4.75 percent to 5.00 percent, is not akin to "Pi, a special number that reveals many secrets."

“The future rate path remains uncertain and data dependent, and all that has happened is the Fed has jumped out to a faster start on the path to neutral, an appropriate move given how far they are from their likely destination,” wrote Rieder.

He added that his key takeaway from yesterday’s move is that the Federal Reserve will be lowering interest rates persistently for the next two years.

In terms of action, Rieder recommends “middle of the yield curve assets, particularly those yielding more than U.S. Treasuries, as they provide great income, as real rates are still high, even though the Fed will be attempting to bring those elevated real rates down in the year to come.”

Elsewhere, Ashish Shah, global co-head and chief investment officer of public investing within Goldman Sachs Asset Management, said the Fed is shifting into a “back to the business cycle” mode. With inflation easing, he expects approximately 250 basis points in adjustments over the coming year.

“Dialing back restrictive monetary policy could extend the US economic cycle – benefiting both bonds and risk assets – but investors should pay attention to tail risks. Yet positive catalysts in a stable economic backdrop and now falling interest rates continue to line up around the ‘soft-landing’ narrative,” opined Shah.

In his view, investors should seek to lock in higher rates for their cash with shorter-term fixed income allocations on the bonds side and buy small cap stocks, especially health care and software stocks.

Meanwhile, Jay Woods, chief global strategist at Freedom Capital Market, found the most interesting part of yesterday’s announcement was not the size of the cut, but the fact a Fed Governor, on the record, dissented from the other 11 members of the FOMC.

“Michelle Bowman broke with the ranks and it may be a bit telling. Usually we hear more about possible dissension in the minutes but they vote the same way. This was a tad more telling, maybe the descent to a soft landing will be a tad more bumpy than believed,” posited Woods.

Jack McIntyre, portfolio manager at Brandywine Global, sees a different clash brewing. In his post-announcement note, he stated that “it now will be a battle between market expectations and the Fed, with employment data—not inflation data—determining which side is right.”

“Since this policy move was mostly telegraphed, there is no outsized move in financial markets. Now, everyone is back to data dependency,” said McIntyre.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, borrowed an oft-used verb by Powell in his post-cut press conference – “recalibrate” – to offer his views on the Fed’s actions and its impact on the nation’s financial future.  

“Going forward, we expect the Fed will move in 25 basis points increments to further recalibrate policy barring a material deterioration in the labor market,” wrote Schulze.  

Finally, Charlie Ashely, portfolio manager at Catalyst Funds, pointed out that every committee member voted for the 50 basis point “jumbo cut,” with the exception of Michelle Bowman who preferred 25 basis points. This indicated to Ashely that the Fed is prioritizing the employment side of their dual-mandate rather than inflation.

He also warned investors not to take the market’s immediate reaction to the Fed’s move too much to heart.

“The moves in equities and treasuries right after the announcement indicate that the market is concerned about the economy deteriorating but today looks to be a different story,” said Ashely. “However, market action immediately after Fed announcements tends to be erratic and irrational."

Best moves for bond investors as rate volatility rises