Fed Chair Powell 'strong-armed' committee into 50bps: Morgan Stanley Investment Management

The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) reached record highs in Thursday's trading session after the Federal Reserve delivered a supersized 50-basis-point interest rate cut. Morgan Stanley Investment Management co-CIO of global balanced funds Jim Caron joins Market Domination Overtime to discuss the Fed's move and what it means for markets. "I think that Powell wanted to go 25 basis points in July, and I think the committee voted him down, and he looked back with some regret. And I think if you look at the way that the committee voted this time around, it feels like the FOMC committee was strong-armed by Powell into saying, 'Look, we didn't go in July 25 basis points. We should've cut. Now we've got to make that up and we should have already been cutting. So therefore, we have to do the 25 in September that we're going to do anyways. So that totals 50 basis points," Caron tells Yahoo Finance. While most of the committee is in agreement that rates should come down in 2024, he notes that they start to differ in their outlook for 2025 and 2026. "So this has the earmarks of really the chair exerting his influence and strong-arming the committee in some ways into going to a 50 basis point cut," Caron says. Many traders expected the Fed to initiate a cut of 25 basis points, and Caron believes that the decision to cut 50 created a two-sided risk for Powell. He explains, "The first risk that I'll say is that if they go too aggressively too quickly, they could potentially reignite some of the inflation fears, inflation concerns. And if inflation becomes unanchored, that will prevent them from... cutting rates as much as they'd like to cut in the future." He continues, "But on the other side of this is if they didn't cut rates aggressively, then it could be that the unemployment rate starts to accelerate higher, and then they have a much deeper downturn in the future, and then they have to be more aggressive in terms of their rate cuts later." As the Fed continues to ease rates, Caron believes that earnings will become more valuable to investors: "When they think about 2025 full-year earnings, the consensus is around $280. What multiple would an investor pay on that $280 consensus view? And the answer is coming back that somewhere around 20 or 21, which when you put those two things together, suggests an S&P 500 of closer to 5,800, even 5,900, or even possibly slightly higher than that."
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