The Fed’s Big Half Point Cut… And The Impact On The Housing Market 9/18/24

0:00Live from the Nasdaq market site in the heart of New York City's Times Square, this is Fast Money. Here's what's on tap tonight. The Fed's whipsaw effect on the markets. The S &P and Dow hitting new records after the central bank cut its target rate by 50 basis points, but then closed in the red. What Chair Powell said that got the markets moving. And turbulence ahead? Tens of thousands of Boeing employees facing furloughs as the company looks to cut costs. The impact on the company and the industry coming up. Plus, time to buy Apple, the level one top analyst is waiting for before jumping in.

0:29Perking up Starbucks, why Bank of America sees upside for the coffee chain. And will FedEx deliver? What to expect from earnings tomorrow and the options action on that? I'm Melissa Lee coming to you live from Studio B at the Nasdaq. We've got a mega desk for you tonight. Very important day in the markets. Tim Seymour, Karen Feinerman, Dan Nathan, Guy Damian, Michael Kontopoulos, Director of Fixed Income at Richard Bernstein Advisors. Welcome, Michael. We start off with the Fed rate cut heard around the world. The central bank slashing its target rate by half a percent, sending S &P 500 and Dow briefly to all-time highs.

0:59But after a seesaw afternoon, both those indices and the Nasdaq ended fractionally lower. The Russell 2000 meantime just barely managed to lock in a sixth straight day in the green. The central bank's first rate cut in four years also sent Treasury yields higher across the curve with the yield curve steepening to its biggest spread in more than two years. Gold also notching a new intraday record before coming off those levels, settling just shy of$2 ,600, while the dollar index hitting its lowest level since last July. Rate-sensitive assets catching a bit. The XHB Home Builders ETF jumping to a fresh intraday record, while the KRE Regional Bank ETF popping more than 3.5 % at the highs of the day.

1:37Let's get more on the Fed decision now with senior economics reporter Steve Leisman. Steve, you got the first question out of the gate. Yeah, and I tried to understand what was going to happen next. Well, we got the Fed with that modestly expected 50 base point cut, lowering rates for the first time in four years down the new level, 475 to 5 percent. The key word of the day from the chair was recalibrate. He said it nine times, suggesting the Fed has more to go to get policy to an appropriate place and perhaps not especially closely tied to the data. You'll see that it's a process of recalibrating our policy stance away from where we had it a year ago when inflation was high and unemployment low to a place that's more appropriate given where we are now and where we expect to be.

2:24And that process will take place over time. Here's where the average Fed official thinks rates are going to go. 2024, 4.4 percent or 100 down by year end. 2025, 3.4 percent. Another 100 down in 2025. And then settling down to the long run rate of 2.9 percent, which, by the way, was up a tick in this summary of economic projections in 2026 and beyond. Powell and the Fed tried to counter the notion that this was a panic move by suggesting the economy remains in good shape. Three essential points. He said the economy is growing at a solid pace. So to the statement, inflation was closer to the 2 % target.

2:59Fed is more confident we're heading there. And the labor market is still solid, even though he based the move today on recent labor market data that suggested some weakening. So the doves getting most of what they wanted today and either were spooked by the amount of the cut or simply sold on the news after coming a long way, Melissa. You mentioned that you're trying to understand what comes after, Steve. And did you think you got a clearer picture? Because what struck me was the Fed's confidence that unemployment would actually, you know, stabilize and not get much, much worse. And the confidence behind that and the confidence in the ability to step in, should it tick higher than they expect by your end?

3:37Well, they do have a lot of ammunition. They feel pretty good about that, Melissa. I think that's part of the confidence right there. They've had pretty good luck with the numbers so far. He took a lot of signal, apparently, from that revision of the job market saying, hey, maybe jobs are much weaker than we previously thought. So that was a reason for them to move. And so now what they're saying, remember, for months and months and months and actually years, they were saying we're squarely focused on inflation. That's our problem. Now they're saying they're squarely focused on both sides of the mandate.

4:10And in order to get to the place where they are correctly addressing risks on both sides of the mandate, they have to do what? Well, there's your word of the day. They have to recalibrate Poff's policy, get it down to a place where if there's further weakening in the jobs market, they're in a position. I've used this dumb metaphor for a while, Melissa. The idea of this was during the Olympics. It worked out pretty well. If you're the guy spotting the gymnast, you have to be in a place to catch them. The Fed was not. It was several steps back, could not step in to help the economy. Needs to get down further than neutral to be in that place.

4:46All right, Steve, thank you. Steve Leisman covering all the action from Washington, D.C. A huge historic rate cut today. So what do we make of it? Michael Cantopoulos, I'm curious what your your take was of that conference, because that is really the key here at this point. Yeah, there's so much going on today that we could talk about, honestly. I mean, starting with the confusing message from Chair Powell. I mean, how could you have a good economy where everything's solid yet, you know, jump in at 50 basis points? So right off the bat, I think the message was somewhat confusing. I think it was one of his weaker performances, quite frankly, because of that.

5:18And I think the market reflected that through the volatility throughout the day. But I think everybody needs to recognize we're in an incredibly unique environment here. You virtually have never had a Fed cut interest rates at a time where profit growth is accelerating. and you've almost never had an unemployment rate going up when profit growth is accelerating. So it's a really weird sort of time frame that we are currently in. And listen, I think today's 50 base point cut is just an indication of that, to be honest with you. Yeah, I was impressed by GDP growth outlook to 2027. If you have 2 % economy between, that's all the market needs to know.

5:52With the labor market here, with rates that still now, or we've got guidance that we're going into 26 at 290 on Fed funds. I mean, that should be enough for equities. I think the market could be a very different story. I think you have a dynamic here. We're at all-time highs today. What do you want? And I think this was a dynamic. I do think, I agree with Michael, a lot of inconsistency. The Fed was bold on the statement, not bold necessarily in the commentary. And the question also is, hey, what would the market have done on 25 basis points with the exact same Fed statement? I don't know. I think it might have gone higher.

6:24Yeah, I actually somewhat disagree. First of all, I thought Powell did a good job. I thought that 50 basis points was the right amount because they've sort of been slow, right? They haven't done anything. Could have argued maybe 25 in July. And so to me, 50 basis points when real rates are this high, that seemed appropriate. And the other thing about it is two things. They don't want to risk being behind the curve again. Clearly, they made that mistake in the transitory way on inflation. And the second thing is, if they do 50 and it turns out to be wrong, all right, that's not the end of the world.

7:00They can just slow down. They can do nothing at the next meeting. And I also thought he was pretty, I thought he was rather sanguine on the economy. But I feel at real rates this high, he had the room to do it. Right. I mean, if you just look at it in the most simplistic way, the markets hit all-time highs, didn't sell off after that, right? Had every reason to move in a more distinct manner. It did not. If unemployment peaks at 4.4 percent and stays there and that's the highest we see it, that's pretty good, too. By many, you know, by many accounts, some would say that he actually stuck the landing.

7:34If this all pans out, he stuck the landing. Mission accomplished. Yeah, I think the main comment that I took again, by the way, yeah, there's more Jim. But that worked better during the Olympics that were on Peacock, by the way. I think the main comment that I took away was that risks are balanced between their dual mandate. Right. So they feel very confident that they're going to get down to two percent, you know, inflation. He said over the course of this year on many occasions that they are not going to wait to lower interest rates until they get down there. Right. And so now you have three point six to four point four in the unemployment rate.

8:06And he just said they want to support these levels, you know, and he did say that they are historically low. Right. So you take the stock market, you take the way mortgage rates have come down from above seven percent to below six percent. He did spend some time talking about rents in the housing market. He said that was the one sort of laggard sort of situation. And he also said that we get the, well, he didn't say the cumulative factor of inflation, but he did highlight the fact who that hurts the most, right? And so I think this move is definitely focused on the lower end of the economy. And so I think it made sense.

8:39And so when you just put it all together here, man, like there was more, I think, anticipation for this than there should have been. And I think that NVIDIA's earnings last month were probably more exciting than this. And we asked that question on many occasions in August. A couple things. So I think the last two times they've started the rate-cutting cycle with 50 basis points was, I want to say, January of 01, market went down 40 % over the next year and a half. And again, in September, I'm reading, of 07, over the next year, the market went down about 50%. Okay, so that's not enough data, but that's just, anecdotally, that's an interesting thing to look at.

9:14The two things that I took away from today, the reversal in the S &P, we talked about the reversal the other day to the upside. Well, you got a reversal of the downside. And the bond market today is really interesting. And we've said this a hundred times. It's not the inversion. The inversion is the warning sign. It's the re-steepening. And you saw it in spades over the last couple days. So let's see how this all plays out. The move in the bond market today was interesting. And the fact that the VIX actually closed higher on the day I think today is interesting. The movement in the bond market is an interesting one, Guy.

9:42But I would say that because the long end went up, it was more of a reflection that the bond market's pricing in higher future growth and inflation, essentially saying that maybe Powell is stepping into, admittedly, a very small mistake by easing financial conditions, easing monetary policy, thereby accelerating potential long-term growth and inflation. So bear steepening, in other words, from the long end, is something that ultimately could say that the Fed has moved too fast. Moved too fast. Yeah, absolutely. So that means that there is a risk potentially of reinflating the economy? I think that is the risk.

10:18I think that's the thing that no one's talking about. Everybody is wondering, you know, seeing the unemployment rate going up and is so focused on an economy that's weakening instead of maybe saying, hey, maybe we're just going through normalization and we're actually going to reignite growth here. Yeah. Is that a concern of yours, Karen? I mean, you see rates come down and, you know, consumers step into the housing market. All of a sudden the rates on the credit cards are lower. They might buy more. I mean, you know, these are real risks. Right. But I think that, you know, you've got to titrate a little bit.

10:46Right. We have room for that. I think, you know, just to pick up the sports metaphor. I'd like to keep this going all night. My forte. So let's go. All right. So where's the puck going? The puck's going inflation lower, unemployment higher. Right. Right. And so I come back to that as a fundamental, a good support for the 50 basis point cut. I'm not I'm not so focused on we want some of these things to ignite. Right. We want we need help on the housing market. So you need to have rates come down to get that all that stuck existing inventory out. But how why are you so convinced that unemployment is necessarily going to continue to go up?

11:24I mean, corporate profits are broadening and look great. I mean, who's laying people off at this point? I also think that the rise in the unemployment rate is misleading. I think the participation rates gone higher. The separations haven't necessarily gone higher. The job opening dynamic is, yes, it's a leading indicator of the labor market. But right now, I don't think the labor market's falling apart. And it's interesting, though, that the Fed is different from June, where they were 4 % year end on the unemployment rate. And now they're between 4.2 and 4.3. So clearly a more bearish tax. I think the market paid attention to that, too.

11:55Yeah. All right. For more on the Fed's big cut, Ben Emmons joins us here on set. He's a founder and CIO of FedWatch Advisors. It's literally a full house tonight. There's not an extra seat. We can't jam it. I mean, maybe in the middle. It's a donut. So all the players are on the field, so to speak. We're all in play. Matt, since we're going with the gymnast. We're trying. Ben, what was your take on the message today? Did you also think it was muddled, as Michael had said? I don't think it was that muddled. But what immediately caught my attention was that forecast for the unemployment rate for this year, jumping to 4.4.

12:28And that's why I think they lowered rates by 50 basis points, because they see that weakening in the labor market somewhat coming through, and they just don't want to fall behind the unemployment rate, so to speak. Because as I said before, once it goes up, it keeps rising, you would have to slash rates really aggressively to get ahead of that. On the other hand, there was also a message about, yeah, the economy is in good shape, it's not really an issue, but we want to keep it that way. And so that whole forecast was the soft landing. And by getting this unemployment rate down over the course of next year, which goes from 4.4 back towards 4, Or, yeah, you need to front load rate cuts.

13:03So I think the other interesting change was the median for 2025 going down 100 base points, basically saying, like, we're going to front load this easing cycle if we have an issue with the labor market. I think that was part of the push in the market, the risk on sentiment of, like, you're drawing a line in the sand on unemployment. I mean, that was the one change in the statement from the previous meeting to this meeting, and that is in the jobs statement. This time they said job gains have slowed versus moderated. So they are paying attention to that. But do you have confidence that you can go to 4.4 % and that's the line in the sand?

13:40I mean, that seems like, I don't know, arbitrary. Like you said, once it starts ticking higher, it's hard to wrest control of that. Yeah, that's what I read from it. They put that forecast out there. Obviously, they did modeling and all that. But they put that out there to sort of give a gauge. So like, here's really a pain point. Like if we get to that level or higher, then they have to change their rate forecast even more. And so I think this is the message for the bond market, too. Like to your point, like you get this curve steepening, I guess, and partly because this 50 base points cut may give the economy a little push here.

14:14Because GDP now is back to 3%. Retail sales were stronger. Empire manufacturing was better. So it's a little activity already happening on just signaling rate cuts. So you're going to add the rate cut, get a little push here so the curve gets steeper. But you do draw that line in the zone at 4.4 % to actually keep that activity going. If not, you've got to cut more. Karen thought 50 for a while. She's right. Let me ask you this. Is a 50 basis point cut them basically saying we think we've beaten inflation and it better not come back? Otherwise, we're going to sort of look pretty foolish three to six months from now.

14:49Thoughts on that? Yeah, and that's what was interesting, Guy. They asked him this in the press conference, right? So taking the victory on inflation, he kind of stayed away from that, probably acknowledging that you do push the economy a little bit. So there is a possibility that in a year from now, which is in a stronger economy that nobody actually expects, like it was a stronger economy and inflation does get further above target. Again, it's all about employment currently. And I think that's why they want to take their chances on the inflation picture, feeling confident. It's at a level where it doesn't go higher.

15:24Do you think it's maybe not consistent that Powell is saying that they're data dependent, yet also indicated virtually in the same sentence that the cut cycle has begun? So if the cut cycle has begun, he's saying that, then you're not really data dependent, right? Yeah, because you basically, but he also said like in the SAP, there are multiple cuts, even though you have one descent, which is basically implying like we're all consensus here that we're going to keep lowering rates from here. So it's not a one deal here, one cut, and that's it. Like maybe the 95 cut that we saw at that time, which is that one cut.

16:03So it is about a trajectory here. And do you think that trajectory is now 50? It could be. But by my own calculation, it's that we've got the Fed funds rate accounted for inflation going up about 100 base points this year. So FedFund's rate of 5.5 and inflation going down. So that's tightening. Plus the balance sheet has shrunk. And you can do a calculation on how the FedFund's rate would do on that balance sheet. So that ran up too. So I calculated roughly about 150 base points of tightening, passive tightening has happened this year. I think that's what they want to take away currently. So you did 50 today.

16:36Then you could easily do another 50 the following meeting, even though that sounds large, just on that passive tightening. Do either of you fixed income sort of guys? is are you confident that 50 won't stoke the economy enough for inflation to come back so that a Fed hike? I mean, can a Fed hike be on the table? Possibly? Absolutely. There's no reason why not. And in fact, that's not what anybody thinks. I mean, people think cutting cycle and it's a cycle. That's the other consensus. Pay trade, I would argue. And as you get closer to 2025, remember, your comps are a lot easier. So just on a comp basis, as you get to the first quarter of next year, inflation is going to be harder to keep below or at 2%.

17:17Now, listen, we can argue whether year-over-year numbers actually matter because you're looking at three-month and six-month and so on and so forth, but the year-over-year number may actually start to creep back up early 2025, and that might cause a problem if the Fed has cut 100 basis points or 125 basis points by then. Yeah, Ben, what are your thoughts? Yeah, I'm with your thoughts. I think that's right. I mean, because you're coming from this lower base, yes, you're going to get another base fact next year. But I think this 50 basis points, think again of what Bostic said a couple of months ago.

17:46They did a survey in Atlanta area, and they said, like, they found out from every business owner there that, OK, you're going to cut rates. I'm going to have more sales. I'm going to hire more people. I'm going to invest. I'm going to see all this activity happening. So, you know, it is already somewhat happening. I think this is this 50 basis points is to push to the economy. It should ultimately lead to lower unemployment, hopefully, but it also should probably lead to inflation staying above the target longer. Doesn't it matter where the neutral rate is, though? I mean, doesn't it matter? I mean, it's where we end up.

18:13And I'm not sure anybody knows, but you can be sure. And it's something that we've been saying a lot lately is that the bond market's in a very different place than the credit market and the equity market. The rates market is saying recession. And or it's certainly saying a lot of slow economy ahead, not 2%. So. Yeah, so there's 3.4 % that's in the forecast. That has been priced in the bond market now since the Fed started tightening rates in March of 2022. If you look at these forward rates, basically implying that is sort of your neutral rate that people think that the Fed could end in an economy that's slightly above trend with inflation above target.

18:49Whereas that long-run rate that the Fed put down in the dot plot is lower, it's more like 2.9. That's when inflation is supposed to be a target. So I think the bond market is more looking at you're going to hit that short-term rate first, 3.4. And I had to add other discussions, Tim, like we had. But 3.4 is also a major support in the 10-year in the long-term trend. So I think this is an important point that I think the bond market will test. And we'll see where we go from there. Ben, great to see you. Thank you. Thank you. Ben Emmons of FedWatch. Has your market outlook, equity specifically, changed from 24 hours ago?

19:23Well, not really. And you can tell from investors it didn't change too much. And it's going to come back to, I think, where S &P earnings are going to end this year and what do they look like next year. Right now, it seems pretty lofty that we're going to have 13%, 14 % year-over-year earnings growth. I'll just say this about inflation, and we're spending so much time talking about this and whether the Fed did like an omission-accomplished sort of situation or not. I think we have to go back and remind ourselves why we had this inflation problem. It was a black swan. You know what I mean? We did lower interest rates then.

19:51We had lots of fiscal stimulus, you know what I mean, that got everything going in a way that nobody in our lifetimes have really, maybe guys, But no one has really seen anything like this before. And so I actually now, years later, take some issue with that whole transitory thing that we spent so much time talking about in 2021. And, you know, you think about it, if they get through this without a recession, yeah, they might have juiced it along with fiscal and monetary and everything like that. But it's not the end of the world because 4.4 percent unemployment is really low in historical standards.

20:23And when you think about what they just guided GDP to, it's basically the average that we've been ex-COVID going back to the financial crisis. So there's a way that things could just stay going. And then the stock market just stays expensive. Like, that's it. You know what I mean? Just one thing I want to add on inflation. I mean, I do think that we could see, all else being equal, a benefit from housing costs coming down in inflation. It's been sticky. That one's a lag. That's an important element. And I do think it will come down. What about HELOCs, too? I mean, like, that's the other thing.

20:53If you saw mortgage rates come down substantially below 5 percent, I mean, some people have been waiting to kind of tap the equity in their houses. That has actually gone up a whole heck of a lot in the last five years. Right, so people can tap that and then they can spend lots of money and then, you know, the economy is booming and we have inflation again. So, I mean, if you can get – you're making the assumption you can get those loans. I mean, you know, just because rate doesn't mean these loans are available. I mean, there's a lot that still has to happen. Rates going lower doesn't mean rates are going lower.

21:19I mean, if you think magically your credit card rate is going lower, think again. If you think this is going to affect your insurance, think again. And I'll say this. I mean, we don't talk politics here. I can almost guarantee within the next six hours or so, you're going to be hearing how this was a political move meant to help the party that's in charge and meant to help the candidate on the Democratic side. I'm just putting it out there. It's going to happen, and you're going to hear it over and over again. Coming up, we'll have much more on the Fed's rate move and the impact on the housing market.

21:50But first, thousands of Boeing employees facing furloughs as the machinist strike rolls on. The latest on negotiations and what could be next in Boeing's cost-cutting measures. And a technical call on Apple, how analysts say you should play the tech giant when Fast Money returns. Back in two. Tens of thousands of Boeing employees will temporarily be out of work after CEO Kelly Ortberg announced sweeping furloughs in an attempt to preserve cash. The news comes as 30 ,000 machinists remain on strike at the company. Union contract talks resumed today. Boeing's CFO said earlier this week the company would freeze hiring and raises.