How does the ASX 200 perform after the first Fed rate cut?

The US Federal Reserve's highly anticipated rate cut was met with a subdued market reaction. Major US benchmarks ticked slightly lower while the ASX 200 edged higher on Thursday.

The magnitude of the rate cut caught the market off guard as historically, the Fed only pulls out the big 50 bp guns during periods of underlying economic weakness.

Historical context adds a bearish perspective to last night's decision. Following the Fed's 50 bp cut on 3 January 2021, the S&P 500 fell approximately 39% over the next 15 months. Similarly, after the 18 September 2007 cut, the market tumbled 54% over the following year. Both instances preceded economic recessions.

Fed rate cut highlights

In his press conference, Fed Chair Jerome Powell emphasized that this cut doesn't signal significant economic weakness. Instead, he framed it as a "strong start" to recalibrating monetary policy in response to gradually softening data since July. Some of the key highlights from the Fed and Powell's press conference include:

• The Fed cut rates by 50 bps to 4.75% – 5.0%, this marks the first rate cut since March 2020

• "I don't see anything in the economy that suggests that the likelihood of a recession, or a downturn, as elevated ... You see growth at a solid rate. You see inflation coming down and see a labour market that is still at very solid levels."

• The Fed’s latest summary of economic projections (SEP) shows a median 2024 Fed funds rate of 4.4% of 100 bp of cuts by year end and 100 bps of cuts in 2025

• The projections reflect a "recalibration" that the Fed could follow if the economy develops as expected but Powell stresses it shouldn't be taken as guidance

• Fed notes "greater confidence" in the trajectory of inflation while job gains have "slowed", changed from prior "moderated"

• Overall – A slightly hawkish press conference as Powell stressed that the economy and labour market remain solid and the dovish SEP is not concrete

The Fed's rate cut history

Historically, Fed rate cuts have occurred for various reasons, from responding to recessions to addressing stubborn growth concerns. Here's a brief history of rate cut catalysts dating back to 1990 (ex-GFC and pandemic):

• 1990: The Gulf War recession lasted from July 1990 to March 1991 but high unemployment persisted from 5.2% in June 1990 to 7.8% two years later

• 1995: The roaring 90s was met with three rate cuts over a six-month period amid stubborn unemployment of 5.6% and weaker-than-expected retail sales

• 1998: This rate cut was in response to a series of Asian currency crises, which spread across Latin America and Russia

• 2001: The dot.com bust spilled over into the real economy, driving a modest contraction in GDP, higher unemployment and an eight-month-long recession

• 2002: The Fed was worried that the economic recovery was anemic and inflation was worryingly low

• 2019: Powell called this a "mid-cycle adjustment", in other words, easing rates midway through the typical expansion-to-recession business cycle

ASX 200 post-rate cut performance

The S&P/ASX200 performance after the first Fed cut has varied.

Numbers at a glance

The overall numbers paint a rather bearish near-term story for the local share market. But that's largely because the Fed was cutting into a recession.

The ASX has typically performed quite well during periods when the Fed cut rates to address growth concerns rather than major economic crises.

Recession or no recession

Looking ahead, markets will be keenly watching whether the Fed can navigate a soft landing and avoid a recession in 2025. Goldman Sachs data suggests that the S&P 500 typically gains approximately 15% within a year of the first rate cut if a recession is avoided, but falls by a similar percentage if one occurs.

Recent economic indicators have shown some signs of weakness, including:

• US employers hired 114,000 workers in July, well-short of economist expectations of 185,000 jobs

• US manufacturing PMI slumped to an eight-month low of 46.8. The survey's forward-looking new orders sub-index fell to 47.4 amid subdued demand

• US initial jobless claims briefly jumped to 249,000 in the week ended 27 July, the highest level in almost a year

Recent economic indicators suggest a softening trend but they are far from recessionary. The market continues to hold its ground near all-time highs, awaiting clearer signals. However, this delicate balance means we're just one headline away from another economic concern-driven selloff. Given the ongoing weakness in the Chinese economy and volatile US economic data, further market fluctuations wouldn't be surprising.