The anticipated Fed rate hike finally happens: Markets react with mixed feelings

The highly anticipated interest rate cut by the U.S. Federal Reserve has finally arrived. The markets initially reacted very positively to the end of restrictive monetary policy. However, the euphoria was short-lived, as trading on Friday brought new concerns about corporate earnings and economic growth. Despite this, the stock markets recorded overall gains for the week. The S&P 500 closed the week up by about 1.4%, the Dow Jones Industrial Average rose by 1.6%, and the Nasdaq Composite gained 1.5%. Although Friday weighed on the S&P, the index had previously reached an all-time high, and the Dow also closed with a record. A central topic for investors in the coming week will be whether new data supports Fed Chair Jerome Powell’s assertion that the U.S. economy remains strong. The release of Q2 GDP data on Thursday will serve as an important verification of this claim. Powell also emphasized that the fight against inflation is not yet fully won, as price increases continue to diminish. The release of the Personal Consumption Expenditures (PCE) index on Friday, the Fed’s preferred measure of inflation, will provide further insights in this area. Quarterly reports from Costco, Micron, and Accenture are also on the agenda. The quiet period is over and so is the restrictive monetary policy – the public can expect fresh comments from Fed officials in the coming days, likely providing further details on the recent decision. At least eight central bank officials, including Powell, the Fed’s Vice Chair for Supervision Michael Barr, and New York Fed President John Williams, are scheduled to speak or participate in conferences to shed light on the Fed’s decision to cut rates by 50 basis points. Fed members foresee two more quarter-point cuts for the year, followed by four more in 2025. Powell made it clear that the Fed was not trying to make up ground by opting for a larger rate cut. He also stated that 50-basis-point cuts should not be viewed as the new standard. However, a significant cooling of the labor market could challenge both assertions. Over the past two years, the Fed has focused solely on controlling rising prices since inflation remained high and the labor market tight. Now that inflation is subsiding and the labor market is easing, the Fed must advance its dual mandate on both fronts. Analysts expect the PCE to fall by 2.3% year-on-year on Friday – compared to 2.5% in the previous month – which would further support the Fed's decision. Despite the diminishing inflationary pressures, the central bank has not yet reached its 2% inflation target. Easing the reins too soon could lead to a resurgence. Tech investors are looking for new catalysts, and the Fed may have just provided them. After a mixed earnings season where Wall Street reacted impatiently to significant AI spending, the interest-sensitive sector could be back in growth mode. Of the "Magnificent Seven" stocks, all but one posted gains last week. Nvidia, the sole loser, fell more than 2% as it struggled with volatility following a remarkable spring and summer. Nevertheless, some analysts see a more nuanced picture.