U.S. stock market rally comes to a halt? Concerns about Federal Reserve policy reignite, market sentiment shifts to wait-and-see

According to Zhitong Finance APP, the upward trend in U.S. stocks faces a test on Monday as investors weigh the extent of the Federal Reserve's interest rate cuts and how these measures will affect the broader business and economic environment.

Federal Reserve Chairman Jerome Powell conveyed hopes for future rate cuts to Wall Street at the Jackson Hole annual symposium last Friday. He stated that "the current situation may prompt us to adjust our policy stance," which is often seen as a signal for the Fed to cut rates.

As a result of this news, U.S. stock markets surged last Friday, while U.S. Treasury yields fell sharply. This partly reflects market expectations that the Fed will cut rates at its meeting on September 17.

However, on Monday, market sentiment shifted from optimism to caution as experts assessed the Fed's upcoming policy direction. U.S. stock markets generally declined, and the yields on short-term U.S. Treasuries, which are more sensitive to Fed policy, rose.

Jason Granet, Chief Investment Officer at Bank of New York Mellon, stated, "If the Fed really takes action, I would prefer it to be slower rather than faster. They are definitely keeping the door half open, rather than kicking it wide open in September."

On Monday, traders were almost certain that the Fed would lower the target rate by 25 basis points in September, with the current rate around 4.3%. According to the CME Group's FedWatch tool, the probability of a rate cut in September is 82%, slightly higher than a week ago, but well above the 62% from a month ago.

Future Rate Cuts May Slow

The market expects only a 42% chance of another rate cut in October. The market has fully priced in expectations for a second rate cut in December, but the likelihood of three rate cuts this year is only 33%.

Granet noted, "I think there is still more information to be gleaned from the data between now and the September meeting. So the focus will shift to the pace of rate cuts."

Some are skeptical about accelerating the pace of rate cuts, mainly due to ongoing concerns about inflation triggered by tariffs and the economy still showing growth, despite signs of a slowing labor market.

Lisa Shalett, Chief Investment Officer at Morgan Stanley, stated, "While we are aware that the Fed faces significant political pressure to adopt accommodative policies, and we have noticed some cracks in labor market data, from our perspective... the reasons for rate cuts do not seem sufficient. We can't help but ask, what exactly is the Fed in a hurry to solve?"

Despite market expectations for a rate cut in September, Morgan Stanley believes the probability is only 50%. The firm also pointed out uncertainties regarding inflation and the White House's threats to the Fed's independence.

Shalett also warned clients not to overly rely on the Fed to drive the stock market higher through accommodative policies, as "regardless, we are skeptical about the impact of rate cuts; the reality is that without an economic recession, easing cycles are usually short-lived, and the sensitivity of major economic entities to interest rates has significantly decreased."

Will 2024 See a Repeat?

In the current economic situation, there are still many questions regarding the impact of the Fed's interest rate policy A year ago at this time, the Federal Reserve began a period of easing, but it ultimately produced unexpected consequences—U.S. Treasury yields and mortgage rates moved in opposite directions, as people worried that the Fed might ease monetary policy too soon while also expecting the economy to grow rapidly.

This situation has led market veteran Ed Yardeni to question whether a new round of rate cuts would be wise, as he fears that Powell's assessment of the temporary inflation caused by Trump's tariffs may be incorrect.

"The Fed won't listen to me. Of course, they will still act according to their established plan," the head of Yardeni Research said on Monday. "The cautious way to put it is that when the Fed cut rates by 100 basis points last year, bond yields rose by 100 basis points."

If this situation occurs again, the White House's hopes of lowering U.S. Treasury financing costs and stimulating the housing market by reducing mortgage rates would be dashed.

However, on a positive note, Yardeni believes that rate cuts will boost the stock market, and even in the face of potential policy missteps, he maintains a bullish outlook on stocks. Yardeni believes that the S&P 500 index could rise another 2% this year, reaching around 6,600 points, and then rise another 14% by 2026, reaching 7,500 points.

He stated, "I believe we are entering a new bull market, but I think it will be driven by corporate earnings. If the Fed really decides to cut rates on September 17, then I think the targets I have set may be too conservative."