Weekly Stock Market Update & SPY Analysis
The most anticipated week of the year is here, with all eyes on the Federal Reserve’s interest rate decision at the upcoming FOMC meeting. Although the Fed has held several meetings this year, this one holds particular significance—it’s expected to be the first where they finally reduce interest rates. The key question is whether the cut will be by 25 or 50 basis points.
Back in March 2022, the Fed initiated its rate hike cycle to combat soaring inflation, which had surged to 8.5%, far exceeding the healthy 2% target. Inflation later peaked at 9.1%, according to the U.S. Bureau of Labor Statistics. To address this, the Fed implemented aggressive rate hikes not seen in nearly two decades. Experts knew it would take 12-18 months for these measures to show results, and now, over two years later, inflation has finally cooled to 2.5%, as revealed by last week’s CPI reading, nearing the Fed’s target.
However, the fight against inflation has had significant consequences. Higher rates triggered mass layoffs, created tough conditions for small businesses, and curbed consumer spending. This, in turn, led to a higher unemployment rate in the U.S. and slower economic growth. Last month, unemployment hit 4.2%, while GDP figures have been notably weaker than those before the rate hike cycle.
So, what’s next?
The market rally we’ve seen all year has been leading up to this specific week. Markets knew long ago that a rate cut was coming this year, and they were assured it would come in September months ago. This optimism has driven stock prices higher, as lower rates are generally seen as beneficial for businesses. While it’s difficult to predict the immediate market reaction to this week’s announcement, the long-term view is that a rate cut will be welcomed by investors.
That said, the Fed is navigating a delicate balance. A 25-basis-point cut, which is widely expected, would signal a cautious but optimistic approach to easing rates. However, a larger 50-basis-point cut could be interpreted as a more drastic effort to stimulate the economy, raising concerns that the economic slowdown may be more severe than anticipated.