The U.S. Federal Reserve has lowered its benchmark interest rate by 50-basis points amid mounting evidence that inflation is under control.
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Ahead of the central bank’s latest policy meeting, futures markets were pricing in a 60% chance that the Federal Reserve would lower interest rates by half a percentage point. The Fed Funds Rate now sits in a range of 4.75% to 5%.
Market Reaction
Markets initially rose on news of the 50-basis point rate cut. The benchmark S&P 500 index (SPX) increased 41 points or 0.69%, while the blue-chip Dow Jones Industrial Average (DJIA) gained more than 250 points and the technology-laden Nasdaq index (NDX) rose nearly 1%.
The interest rate cut marks the first time in four years that the U.S. Federal Reserve has lowered interest rates. The move comes with inflation in the U.S. currently at an annualized rate of 2.5%, its lowest level since February 2021 and close to the central bank’s 2% target.
Look Ahead
The U.S. Federal Reserve had undertaken its most aggressive monetary policy tightening regime in 40 years to contain inflation that skyrocketed coming out of the pandemic. Inflation in the U.S. peaked at an annualized rate of 9.1% in June 2022, leading the central bank to raise the Fed Funds Rate to its highest level in 23 years. The decline in interest rates is likely to come as welcome relief to consumers who have been under financial stress from a combination of higher prices and interest rates.
Looking ahead, futures markets are betting that interest rates in the U.S. will be a full percentage point lower by year’s end. With inflation now largely contained, expectations are that the Federal Reserve will turn its attention to reviving the U.S. economy and labor market that are showing signs of a slowdown. The U.S. Federal Reserve’s two remaining meetings this year are scheduled for Nov. 7 and Dec. 18.
Is SPY a Buy Right Now?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on the SPDR S&P 500 ETF Trust (SPY) based on 403 Buys, 95 Holds, and six Sells assigned in the past three months, as indicated by the graphic below. After a 19% year-to-date rally, the average SPY price target of $628.82 per share implies 11.67% upside potential.
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