It was a volatile trading session for the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ) as investors digested a Fed rate cut and accompanying comments from Fed Chair Jerome Powell.
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Wednesday’s Federal Open Market Committee (FOMC) meeting resulted in a 25 bps reduction to the federal funds rate, with 11 voting members in support of the move and Fed Governor Stephen Miran dissenting in favor of a 50 bps cut. In addition, the central bank’s dot plot showed a majority of officials backing at least two rate cuts during the last two FOMC meetings of 2025 in October and December.
Afterward, Fed Chair Jerome Powell said that the driving factor behind the Fed’s rate cut was to address risks in the labor market, which is no longer “solid.” He added that lower workforce participation and immigration have contributed to labor market weakness. At the same time, Powell explained that the risk of persistent inflation has fallen since April, and that his base case is that any tariff-driven inflation will be short-lived.
The Fed’s dual mandate is to maximize employment and keep inflation under control, requiring the central bank to carefully balance both goals. Powell stressed that the Fed would continue to make monetary policy decisions based on economic data while keeping political biases out of the picture.
The S&P 500 (SPX) has historically responded well to rate cuts when the benchmark index is within 2% of all-time highs, with average 3-month and six-month returns of 2.3% and 3.4%, respectively, according to Carson Investment Research. The 12-month return is even better, trading higher on all 20 occasions with an average gain of 13.9%.
Today’s rate cut was the first since December 2024, which could also be a positive for the index. When the Fed waits between five and 12 months to cut rates, the S&P 500 has an average six-month return of 4.4% and an average one-year return of 12.9%.
Additionally, lower interest rates could benefit the housing market by reducing mortgage rates. The 30-year fixed rate mortgage has steadily fallen in recent weeks and is currently sitting at an 11-month low of 6.22%. That comes as housing starts fell by 8.5% month-over-month to an annualized rate of 1.307 million in August, the lowest rate since May, as housing inventory remains elevated.
The S&P 500 (SPX) closed with a 0.10% loss, while the Nasdaq 100 (NDX) fell by 0.21%.
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