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The US Federal Reserve has cut interest rates for the first time since December 2024. The key rate is now lower by 0.25 per cent, as announced at the FOMC meeting. The markets are already reacting, with oil prices down and the stock market seeing an initial push.

Federal Reserve Chair Jerome Powell addressed the media on Wednesday following the FOMC meeting. He disclosed the long-awaited interest rate cut, which he called a “risk-management cut.” The cut brings the benchmark interest rate down to the 4.00%-4.25% range, marking the lowest since 2022. According to Powell, more cuts will factor in inflation and employment rates.

Markets had mixed reactions following the announcements, as data from the trading app shows. Oil prices fell, with Brent crude futures down 0.4% and West Texas falling 0.5%. Global stock markets saw a rally, with the S&P 500, Dow Jones Industrial average, NYSE composite, and Russell 2000 index showing positive returns. The Nasdaq Composite also increased, spurred by a decline in producer prices.

Asian shares also climbed higher, with Chinese AI hardware stocks gaining momentum. SMIC, a chip maker, hit +5.0% and in Japan, the Nikkei crushed a new intraday high with a 1.4% increase. However, Cambricon Technologies fell 1.46% for the day.

Optimism in the US Equity Market

The US equity market is showing a generally positive sentiment. Although concerns about housing deficits and inflation dampened investors’ optimism, analysts predict a positive reaction in the coming months. This is based on future cuts impacting manufacturing and borrowing costs.

What More Rate Cuts Could Mean

More cuts could bring the Federal Funds Rate closer to 3% and the 30-year mortgage rate around 5%. The Fed indicated that at least two more rate cuts are likely by year end, bringing the rate between 3.5% and 3.75%. Further cuts are expected in 2026.

These would align with efforts to prevent recession without spending, as the labor market loses momentum. This underlying labor challenge, with unemployment rates around 4.3%, shows deeper economic issues. The corresponding increase in unemployment benefits claims may also increase the pressure on the economy.

Increased optimism in equities

Tech equities will enjoy lower borrowing costs and should see their stock prices increase. Small-cap stocks historically perform best when the Fed cuts interest rates. As Q3 draws to a close, small-cap stocks may see some rebound and become more attractive relative to large-cap stocks.

International equities, too, become more attractive when rate cuts coincide with a weaker US dollar. This could push demands for non-US equities higher. International equities have already outperformed US stocks on a year-to-date basis.

Impact on Inflation Data

The Fed’s decision was made even though inflation remained somewhat high. The central bank is balancing two goals. They want to control prices, but they also want to support jobs. Lowering rates can ease borrowing costs for businesses. This might lead to higher inflation later on, but the Fed is closely watching economic data. The hope is that inflation will still cool down gradually. Their “dot plot” projections show a belief that inflation will trend downward.

Improved Manufacturing Conditions

Lower interest rates can directly help the manufacturing sector. They make it cheaper for companies to borrow money, which allows firms to afford to invest in new equipment and facilities. This expansion can create new jobs and allow for increased production. This provides a needed boost to a slowing labor market and helps the economy grow from the supply side.

This is a big reason why investors are optimistic about equities. Many US companies, especially in manufacturing, may see their share value increase if manufacturing costs remain low.

Boost on Non-Essential Spending

A rate cut gives consumers more spending power. It can lower the cost of loans for cars and homes and reduce interest payments on credit cards. People have more money to use on other things, which can lead to a rise in non-essential spending. Companies in sectors like retail and travel could benefit greatly from this increased consumer activity, which can drive economic growth.

Stimulate Economic Growth

US President Donald Trump has been pushing for the Fed to lower interest rates to encourage borrowing and spending. With cheaper financing options, businesses can expand and scale, while consumers can make larger purchases. This will stimulate economic growth and unlock opportunities for investors.

What it Means for Investors

Investors tracking the equity market will find many opportunities in the coming months. These opportunities will vary based on market sentiments. Increased fund flows, especially inflows into tech stocks, are a key metric for traders. Bond investors buying up longer-term maturities show where investors are looking.

Investors can stay ahead of trends and anticipate market moves through technical analysis. TradingView’s stock screener is an excellent tool for identifying trending stocks and their performance at a glance.

Closing Thoughts: More Factors Need to Align

Like Powell mentioned, several issues with the economy may force rate decisions in the future. A lower unemployment rate and more investments in critical sectors will help the economy and cause momentum in markets. While rate cuts may lower the cost of borrowing, low interest earnings may see investors pull funds from savings accounts to investment vehicles with better returns.

This content was produced independently from the Worldcrunch editorial team.