Fed cuts interest rates 25 basis points, here's what it means for markets

Core Points - The Federal Reserve has cut its benchmark interest rate by 25 basis points, bringing it to a range of 3.75% to 4%, marking the second rate cut of the year [8][92] - The decision was split, with one Fed governor advocating for a larger cut of 50 basis points, while another preferred to keep rates steady [8][9] - The Fed will cease the reduction of its balance sheet by December 1, indicating a shift in monetary policy strategy [9][96] Economic Outlook - Economic growth is described as expanding at a moderate pace, with GDP growth at 1.6% in the first half of the year, down from 2.4% the previous year [87] - Job gains have slowed significantly, with the unemployment rate remaining low but showing signs of potential weakness in the labor market [10][88] - Inflation remains elevated at 3%, with core PCE prices also rising by 2.8%, indicating ongoing inflationary pressures despite some easing from previous highs [90][92] Labor Market Concerns - The Fed is concerned about the labor market, noting that job cuts have occurred in various sectors, particularly among small firms [50][51] - Layoffs and hiring remain low, but perceptions of job availability are declining, suggesting a less dynamic labor market [89] - The Fed acknowledges that downside risks to employment have increased in recent months, prompting the need for a cautious approach to future rate cuts [11][94] Market Reactions - Following the Fed's decision, major stock indexes saw slight increases, with the Dow and S&P 500 both rising [17] - Bond yields have ticked up slightly, with the 10-year yield trading above 4% [19] - The U.S. dollar has edged higher but remains below the psychological level of 100, reflecting ongoing concerns about its performance [20] Future Considerations - The Fed's future decisions will be data-dependent, with a focus on incoming economic indicators and the evolving outlook for both employment and inflation [95][96] - There is uncertainty regarding the potential for further rate cuts in December, as the committee remains divided on the appropriate course of action [96][105] - The Fed's balance sheet normalization will continue, with plans to hold the size steady while allowing agency securities to run off [99][100]