Fed Rate Cut Looms: Will Markets Echo 2007’s Short-Term Pain?

• Analyst Brett Eth links the Fed’s anticipated rate cut to 2007.
• Fed Chair Powell hints at a rate reduction amid a cooling U.S. job market and nearing inflation target.
• Global markets respond mixedly to potential rate cuts.

Market analyst Brett Eth has drawn parallels between the Federal Reserve’s anticipated September 18, 2024, rate cut and a similar move in 2007. Brett noted that while Federal Reserve rate cuts often lead to long-term market gains, they can trigger short-term declines.

Fed chair Jerome Powell recently hinted at a rate cut in September, expressing confidence that inflation is approaching the Fed’s 2% target. This comes as the U.S. job market cools down, hinting at a possible economic slowdown. Anticipated inflation data, due on Friday, is predicted to be mild, further strengthening the likelihood of a rate reduction. Moreover, current market expectations align with a 0.25% cut at the upcoming Fed meeting, with some analysts even predicting a more aggressive 0.5% reduction. 

Brett explained that in 2007, the Federal Reserve started cutting interest rates when they were at 5.25%. Through seven rate reductions between September 18, 2007, and April 30, 2008, the rate was lowered to 2%.

Similarly, the current rates in 2024 are at 5.25%-5.5%, with initial cuts expected to start on September 18. Projections suggest up to nine rate cuts through September 2025, potentially bringing rates down to 3.25%-3.5%.

The analyst also stressed that although Fed cuts are generally positive in the long run, they often lead to short-term bearish trends . He explained that these cuts do not trigger recessions but are made to alleviate economic stress. Historically, the SP 500 ($SPX) sees an average decline of around 30% after rate cuts. Plus, the market usually takes about 13 months to hit bottom.

Globally, markets have already started reacting to the potential rate cut. Qatar’s benchmark index rose 1.2% in the Gulf region, fueled by gains in Qatar National Bank. Similarly, Dubai’s index increased by 0.8%, bolstered by Emaar Properties. In contrast, Abu Dhabi’s index dipped slightly, and Saudi Arabia’s market stayed flat. Elsewhere, Egypt and Oman saw small gains driven by local market factors.