Five things to watch in markets in the week ahead
Investing.com - Futures point into the green after the Federal Reserve slashes interest rates as anticipated for the first time since December. Chair Jerome Powell notes the need to manage risks going forward, with the central bank particularly wary of a sputtering U.S. labor market. More rate cuts are seen coming this year, although projections from Fed policymakers suggest that debate around such moves could be fierce. Elsewhere, the Bank of England is due to unveil its own rate decision, while gold retreats from recent all-time peaks.
1. Futures tick higher
U.S. stock futures were perched higher on Thursday, as investors digested the Fed rate cut and comments on the outlook for monetary policy from Powell.
By 03:00 ET (07:00 GMT), the Dow futures contract had risen by 141 points, or 0.3%, S&P 500 futures had gained 28 points, or 0.4%, and Nasdaq 100 futures had advanced by 149 points, or 0.6%.
The main averages on Wall Street ended in mixed fashion on Wednesday, with the blue-chip Dow Jones Industrial Average moving up while the benchmark S&P 500 and tech-heavy Nasdaq Composite both dipped.
Along with the Fed’s much-anticipated announcement, sentiment was swayed by shares in Nvidia, which dropped on a report that China’s internet regulator had barred large domestic tech companies from purchasing the semiconductor giant’s AI-optimized chips.
2. Fed slashes rates
The Fed slashed interest rates as expected, bringing down borrowing costs by a quarter point to a target range of 4% to 4.25%, and indicating that two more cuts may be coming in October and December.
Powell described the reduction as a form of "risk management," as the central bank looks to balance the twin pressures of a softening labor market and sticky inflation.
But Powell noted that recently weak jobs data is playing heavily into officials’ thinking, arguing that "downside risks to employment have risen." An acceleration in inflation, on the other hand, was seen as a more temporary challenge.
In theory, decreased interest rates can encourage investment and hiring, albeit at the risk of driving up inflationary pressures.
Wednesday’s cut did not receive the full backing of the rate-setting Federal Open Market Committee, with one member supporting a deeper, 50-basis point drawdown. That member was Stephen Miran, President Donald Trump’s pick to fill a vacant FOMC seat who was confirmed to the position minutes before the start of the Fed’s latest two-day gathering.
Although the cut was in the desired direction of Trump, who has repeatedly called on the Fed to quickly lower borrowing costs to help bolster the economy, it was not as steep as the president has requested.
Responding to questions around the Fed’s independence, which has come into focus amid Trump’s separate attempt to oust Fed Governor Lisa Cook, Powell said it is "deeply in our culture to do our work based on the incoming data and never consider anything else."
3. Fed rate projections in focus
Crucially, the Fed meeting included fresh projections which showed that officials are anticipating another half percentage point in rate cuts by the end of 2025.
Should these come to pass, it would leave borrowing costs at a range of 3.5% to 3.75% -- a decline from the level previously seen by policymakers when the last outlook was released in June.
However, seven of the 19 estimates forecast fewer reductions this year, with one even calling for rates to have stayed at their prior band of 4.25% to 4.5%. This means that debate could be intense heading into the next Fed meetings in October and December, especially as another official -- suspected to be Miran -- has pencilled in rates falling sharply to a range of 2.75% to 3%. Analysts at Barclays said this would be "in line with calls by the Trump administration to rapidly lower interest rates."
Markets, for their part, are now placing a roughly 90% chance of a 25-basis point reduction in October, and about an 84% probability of a similarly-sized drawdown in December, according to CME’s FedWatch Tool.
Meanwhile, the projections showed that most Fed policymakers expect the economy to expand by 1.6% this year, above June’s forecast. The year-end jobless rate is seen at 4.5% and underlying inflation at 3.1%. Price gains are not anticipated to slow to the Fed’s 2% target until 2028.
4. BoE ahead
Attention now turns to the Bank of England, which is set to unveil its own interest rate decision on Thursday.
In contrast to the Fed, the BoE is widely expected to keep interest rates on hold at 4% after last month’s cut, its fifth reduction since August 2024.
Data published on Wednesday showed inflation in August held at 3.8%, the highest in 19 months and almost double the BoE’s 2% target, likely prompting BoE policymakers to vote to keep rates on hold this month as they wait for signs that underlying inflation pressures from the labor market are definitely fading.
Elsewhere, the Bank of Japan -- due to meet on Friday -- is also projected to leave interest rates unchanged amid heightened political uncertainty.
5. Gold falls
Gold prices extended declines in European trading, slipping from record highs amid a rebound in the U.S dollar, as analysts flagged that the Fed signalled a measured approach to further policy easing.
Along with the two rate cuts projected this year, just one more is predicted in 2026, underscoring a more cautious stance from the central bank.
Powell also stressed that decisions would be taken on meeting-by-meeting basis, a sign that an aggressive cycle of rate drawdowns may be unlikely.
“They think three more cuts will be enough to boost growth and prompt a revival in the jobs market, but the market is sceptical,” analysts at ING said in a note.
Gold has surged to all-time peaks in recent weeks, driven by expectations of monetary easing, which reduces the opportunity cost of holding non-yielding bullion, as well as geopolitical uncertainty and strong central bank purchases.