Nasdaq 100: Federal Reserve Poised for Measured Rate Cuts Amid Economic Signals

• The Federal Reserve is expected to initiate its easing cycle with a 25-basis-point rate cut in September, followed by two 50-basis-point cuts later in the year.
• The Fed’s interest rate decisions will hinge on key economic data, including employment figures and inflation.
• Volatility in the stock market is likely to remain as rate cut expectations fluctuate.

Rate Cut Expectations Dominate Market Sentiment

Friday brings minimal economic data releases, allowing focus to remain firmly on U.S. Federal Reserve interest rate cuts speculation. The market consensus had settled around a 25-basis-point cut following Wednesday’s inflation report, but by Friday, the probability of a 50-basis-point cut has risen to 41%, up from 28% during earlier Asian trading sessions.

With no central bank speeches scheduled, the Fed remains in its blackout period ahead of the highly anticipated policy announcement on the 18th of September. While no major changes are expected.

September Interest Rate Cut: A Measured Approach

The Federal Reserve is expected to begin cautiously its easing cycle delivering a 25-basis-point interest rate cut at its September 2024 meeting. According to the CME FedWatch Tool, there is currently a 59% chance of a 25-basis-point reduction, which would lower the federal funds rate to a range of 5.00%-5.25%.

Two deeper cuts of 50-basis-point are likely for the November and December meetings, bringing the benchmark rate to 4.00%-4.25% by year-end. This range, while still considered restrictive, would provide a more accommodative environment compared to current rates.

Fed's Gradual Approach Supported by Inflation Data

The Federal Reserve is likely to favour a gradual approach to rate cuts, despite mixed economic data. The latest inflation report showed a slight acceleration in core CPI, which excludes volatile items like food and energy. This has reduced the likelihood of a more aggressive 50-basis-point cut in September.

Conversely, the August nonfarm payroll report revealed weaker-than-expected job growth, although the unemployment rate held steady at 4.2%, in line with forecasts. This mixed data gives the Fed flexibility to adjust its policy carefully.

Implications for Investors

Investors are keenly watching the Federal Reserve’s upcoming quarterly economic projections, which will provide more insight into the trajectory of interest rates through the end of the year. Market sentiment remains cautious, and a smaller-than-expected rate cut in September could lead to initial disappointment among investors.

Source: TradingView

Stock Market Volatility Reflects Rate Cut Uncertainty

The stock market has been volatile over the past three months, reflecting uncertainty about the Fed’s upcoming rate cuts. Major US indices have traded in a correction mode, with tech stocks in particular seeing sharp movements.

Despite the uncertainty, the Nasdaq 100 index, heavily weighted with tech stocks, is poised to resume its upward trend. A break above the downtrend line from the July 2024 peak appears imminent, potentially leading to an impulsive rally to new record highs in the coming months.

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