[New York Stock Market] US Fed's 'Big Cut' Leads to Broad Decline...Economic Concerns Highlighted

The three major indices of the U.S. New York stock market showed a rollercoaster session on the 18th (local time) following the Federal Reserve's (Fed) big cut (a 0.5 percentage point reduction in the benchmark interest rate) decision, ultimately closing lower across the board. After a sharp rebound due to the big cut decision, the New York stock market gave back its gains amid emerging concerns about an economic recession, cautious remarks from Fed Chair Jerome Powell regarding the pace of future rate cuts, and profit-taking selling, eventually turning to a downward trend.

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On that day, the Dow Jones Industrial Average, composed of blue-chip stocks, closed at 41,503.10, down 103.08 points (-0.25%) from the previous session. The S&P 500 index, centered on large-cap stocks, fell 16.32 points (-0.29%) to 5,618.26, and the tech-heavy Nasdaq index closed at 17,573.30, down 54.76 points (-0.31%).

Market participants' attention was focused throughout the day on the Fed's monetary policy decision announced during trading hours. The Fed announced at the September Federal Open Market Committee (FOMC) meeting that it would cut the benchmark interest rate by 0.5 percentage points from the previous 5.25?5.50% range to 4.75?5.0%. This was a big cut, not the usual 0.25 percentage point reduction. This marked the end of the monetary tightening policy that began with rate hikes in March 2022 to combat inflation.

Fed Chair Jerome Powell cited recently released economic indicators as the reason for the surprise big cut. He explained, "We gathered all the data released since the July meeting and considered what needed to be done," adding, "We concluded that this (big cut) decision is the right thing for the American people and the U.S. economy we serve." He noted that inflation, which had been the reason for maintaining high rates, had significantly eased, and that the labor market was cooling rapidly with rising unemployment, prompting a preemptive response. The August Consumer Price Index (CPI) increase, released earlier, was 2.5%, the lowest in three years and six months. The August nonfarm payroll increase also fell far short of market expectations.

Philip Strell, Chief Investment Officer at Morningstar Wealth, said, "The aggressive big cut decision indicates that the Fed is confident the inflation easing trend is sustainable," and added, "It suggests a shift in focus to avoid economic pressure from prolonged high interest rates." At this FOMC, 11 members voted for the big cut, except Director Michelle Bowman, who favored a 0.25 percentage point cut.

Along with this, the Fed lowered the median year-end interest rate forecast from 5.1% to 4.4% through the dot plot released that day. This suggests that an additional 0.5 percentage point rate cut could be implemented at the remaining November and December FOMC meetings this year. The rate forecasts for next year and the year after were also revised downward.

Following the Fed's surprise big cut decision, the New York stock market surged sharply. However, volatility increased as Chair Powell's press conference began, and the market eventually closed lower. Concerns that the big cut decision was made in consideration of recession fears emerged as a negative factor. Although Powell dismissed recession concerns during the press conference by stating, "The aggressive rate cut is not because there is a problem with the economy," and "There is no evidence at this time suggesting a higher likelihood of recession," the already subdued market did not find a turning point.

CNBC reported, "The market initially welcomed the massive rate cut, but concerns arose that the Fed is trying to respond ahead of a potential economic slowdown," and "amid severe volatility, the market ultimately closed lower." Matthew Rowe of Nomura Capital said, "The market's immediate reaction to the big cut was positive," but added, "It became cautious as the press conference progressed. The market views this as an aggressive move and questions what could trigger it." Additionally, profit-taking selling that had been priced in ahead of the FOMC was analyzed to have poured out in the latter part of the trading day.

In the S&P 500 index, nine sectors excluding energy and telecommunications stocks all declined. Solar stocks showed strength due to the Fed's rate cut. Enphase and First Solar closed up 1.02% and 0.76%, respectively. Bank stocks, which were expected to rebound sharply after the big cut, showed mixed results. Among large banks, Citigroup and Bank of America (BoA) closed higher, while JPMorgan, Wells Fargo, Morgan Stanley, and Goldman Sachs ended the day lower.

Alphabet, Google's parent company, rose slightly after winning a lawsuit related to the European Union (EU) antitrust fine. In contrast, AI leader Nvidia fell nearly 2%. Microsoft (MS) closed down 1% despite news of launching a record-scale data center project with BlackRock by raising a $100 billion fund.

In the New York bond market that day, the benchmark 10-year Treasury yield rose to around 3.71%. The 2-year Treasury yield, sensitive to monetary policy, stood at about 3.63%. The dollar index, which shows the value of the dollar against six major currencies, moved slightly higher around the 101 level. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," rose more than 3% to reach the 18 level.

Oil prices closed slightly lower. On the New York Mercantile Exchange, the near-month October delivery West Texas Intermediate (WTI) crude oil fell $0.28 (0.39%) from the previous trading day to close at $70.91 per barrel.