Every commentator likes to make going into each Federal Reserve meeting that it is the most important meeting, yet if we see the data, the markets more often did not move that much during and after each federal reserve meeting.
This chart aggregates the trading movement for when the trading was down during the FOMC meeting, up, average and the days for rate cut:
Market usually goes up before the rate cut cautiously. More significant were the days where the Fed actually cut rates (purple) or there were big moves (green) on the actual day.
It is like before the meeting, the market starts pricing in the actual movement. So that is already in the price. The for the next 10 days, nothing happens.
For the big up days, they end up flat like 30 days. Its like before the cut and during the cut everything is priced in.
For the red line (or the down days, the move up is more cautious, like the market is a bit cautious about the rate decisions. A week before, the market will move up. When the decision is not what the market likes the market sells down back to when the week started. Then there are not much movement for 10 days, before the market moves up.
Basically… the market moves up lol.
This data makes us take a step back, and wonder how pivotal are these meetings.
A Meeting Where the Market Cautiously Prices in a Hawkish 25 Basis Cut.
2 weeks before the meeting, we know that due to the government shutdown, the Federal Reserve people is not going to get that much of an inflation data.
Some members who prefers not to cut, are more afraid inflation would not be effectively suppress and would not vote for a rate cut unless they see the data.
There are also those pro-cutting, mainly because one of the Fed’s focus is on unemployment and more and more data shows meaningful weakening in the jobs and employment market.
But at 2 weeks, the likely case is that there will be a cut. This is because if they have a chance to cut and they did not cut and because of that the market severely weakens, then it will look damn bad on the Fed. There were already commentary on the Federal Reserve always late or make reactive decisions instead of pro-active ones.
What I understand from Neil Dutta of Renaissance Macro Research and Cullen Roche of Discipline funds is that:
- Inflation is more unknown how it comes about and it can be rather noisy. This means that if you see inflation spike up it doesn’t mean it is always trending up.
- The market is more sensitive to cutting rates. Makes sense because a lot of the mom and pop cyclical industries, have significant borrowing and purchasing power depends on that.
The thing is that there can be a dovish cut or hawkish cut.
The cut has been priced in.
But remember that the market is a forward-price-searching thing.
What will move the market is not that cut but whether in 2026, we are going to see an environment that have more cuts or less cuts. It is not the cut that affect things, but because of the cut, how would businesses do.
Remember the last point because what affects the market is how they priced businesses earnings per share relative to their price, and earnings per share growth.
Rate cuts helped us try to find that.
The Federal Reserve Action
Here are the actual results:
- FOMC cuts by 25 bps as expected
- Three dissents: Goolsbee and Schmid opposed the cut. Miran wanted a 50 bps cut. (Most are not so surprised by Goolsbee because he has stated he needs to see inflation data showing a cooling in non-shelter services inflation, and that data have been unavailable due to the government shutdown.)
- The SEP shows six officials of 19 didn’t favor a cut.
- The median dot is unchanged for 2026.
- The Fed will start “reserve management purchases” this week, beginning at $40 billion per month in T-bills
This is the FOMC Statement Changes:
Chairman Jerome Powell also explain why they cut today than wait until January:
The economy has added around 40K jobs per month since April, but due to overcounting, the actual number could be closer to a *loss* of 20K jobs per month.
“I think you can say that the labor market has continued to cool gradually, maybe just a touch more gradually, than we thought.”
“It doesn’t feel like a hot economy that wants to generate a Phillips-curve-type of inflation.”
So they are worried about meaningful weakness and about the overcounting.
They are also becoming more optimistic about the economy by their revision to projected GDP growth:
- Unemployment peaks at 4.5% this year
- Inflation peaks at 2.9% this year
- GDP for 2026: 2.3% (prior forecast was 1.8%)
So they are anticipating that the economy will look good still and wishes to keep it that way.
It also shows that we have historically lower than average unemployment rate in the past few years and they are okay with current inflation rates.
The Fed also said that they will start buying short-dated government bonds to help manage market liquidity levels to ensure the central bank retains firm control over its interest rate target system.
When they buy bonds, they have to “pay” or put cash into the people selling the bonds, or the US government.
The technically oriented purchases will commence on Friday, the central bank said as part of the policy announcement associated with its latest Federal Open Market Committee meeting. When it begins buying, the initial round will total around $40 billion in Treasury bills per month.
The Fed said in a statement that its buying “will remain elevated for a few months to offset expected large increases in non-reserve liabilities in April,” adding, “after that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities.”
Actually, most Fed watchers were expecting them to stop QT and start asset buying next year. This earlier purchase may be due to the government shutdown putting more stress into the system.
But it can also be seen as a form of providing liquidity.
This is the Fed’s balance sheet after the quantitative tightening (QT):
So we reached back to the boost for Covid and now its not enough we got to start again.
But it depends now because we don’t have that shock.
You may be thinking this is those 2020 quantitative easing of some sort and it may just be a temporary relieve.
Overall, this seems to be the summary:
It is more dovish but…
Ultimately, How Businesses Does Determine How Your Investments Does
I think we should not forget this.
You should read the following from an investor buying and holding for 20 years or more for accumulation and also for income. If you are a short term speculator, you may not fully agree with this.
If you own 5 mom-and-pop business, the earnings per share growth of those five business will drive your overall net wealth.
What will drive an Asia-focus portfolio, an AI-focus portfolio, or a globally diversified portfolio will depend on how they do.
I say this announcement doesn’t matter mainly because the Federal Reserve can do something and:
- They didn’t do enough.
- They did enough.
- They shouldn’t have done it.
And we would only know next time.
The market will constantly trying to price things in:
- If the market is very happy with the cut anticipating better growth from a currently struggling equity base, their share price will go up. But if inflation rears its head, the future meeting will stop or reverse the cut and the market will take a beating.
- If the market is very happy with the cut anticipating better growth from a currently struggling equity base, their share price will go up. And if inflation remains tame the market will stay up.
- If the market is happy with the cut, but the economy continues to weaken DESPITE this cut (basically not enough), then the market once it gets off the price appreciation will head down before recession sets in.
So these are the general possibility and how the price will react in the next two years.
The summary is that… recessions are a feature than a surprise attribute for a long term investor. You are going to go through like 4-8 in your lifetimes.
If you look at it as a feature, know that there will be times your portfolio will look shitty.
It can be quite hard to predict one because if you forgot, we have recession talk since 2022/2023. If you are waiting to invest because the better time is in a recession, that was 2-3 years ago and you will still be waiting.
What you should focus on learning is how you mentally reacts to drop in value in money that is important to you, and how they came back up (if you have crafted a sound portfolio). That is a vital lesson because these short term volatility is going to happen again and again.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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