Executive Summary:
The Fed’s 25-basis-point cut in the federal funds rate last week doesn’t change our S&P 500 price targets or our subjective probabilities of a meltup (25% odds) or correction (20%) by year-end. Today, Dr Ed explores the reactions to the rate cut in the markets for stocks, bonds, the dollar, and gold as well as the significant takeaways from the FOMC’s September 17 meeting. Notably, the post-meeting Dot Plot and press conference revealed less dovishness than many investors had expected. … Also: Dr Ed opines on the weird notion of an indeterminable “neutral” federal funds rate used to determine the restrictiveness of Fed monetary policy. … Check out the accompanying chart collection.
The Fed I: We & the Financial Markets React
Now that the Fed lowered the federal funds rate (FFR) by 25 basis points (as expected) last Wednesday, September 17, we would like to provide you with an update on our outlook for the financial markets:
(1) Stocks. We last changed our stock market projections on September 11, as described in our QuickTakes of that date: “We are raising our year-end S&P 500 target from 6600 to 6800. That’s our base-case scenario with a subjective probability of 55%. We currently assign a 25% subjective probability to a meltup that lifts the S&P 500 to 7000 by year-end 2025 and 20% odds to a correction in the index by the end of this year. If the Fed lowers the federal funds rate on September 17 and signals more rate cuts ahead, we will increase our odds of a meltup and decrease our odds of a correction.”
As it turned out, the Fed’s rate cut wasn’t dovish enough to change our odds—nor as
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