A Fed 50bps Cut Could Weigh on Tech

Equity markets have yet to determine the extent of the anticipated Federal Reserve interest rate reduction, potentially resulting in significant volatility for the tech-focused Nasdaq.

Still Undecided by How Much

Markets have been debating how large the Federal Reserve's interest rate cut will be at the conclusion of its 2-day policy meeting tomorrow. There is consensus that the FOMC will decide to ease monetary policy, but opinions differ on whether it will be a 0.5 percentage point or 0.25 percentage point reduction. Considerable uncertainty also remains around the degree of further easing that may be signalled for subsequent meetings.

Just one week ago, CPI figures showed price pressures remained present, and expectations for a larger rate cut fell to 34%. Since then, no major economic data has been released, yet views have almost reversed with markets now pricing in a 67% chance of a 0.5 percentage point decrease. Some analysts point to an influential Wall Street Journal article last week by Fed watcher Nick Timiraos, who argued the case for the central bank potentially implementing a "double" rate cut. Additionally, several notable editorials at the start of this week called on the Federal Reserve to adopt a more aggressive stance on monetary easing.​

Expectations and Policy

The wide range of expectations creates a situation where financial markets could react strongly regardless of the ultimate decision by the Federal Reserve, potentially generating volatility. Generally, a more accommodating policy would support share prices, especially for technology companies that comprise the largest part of the Nasdaq Index. However, a substantial interest rate reduction could be interpreted by traders as a sign the economy is not stable, leading to sales of riskier assets such as those relying on artificial intelligence (AI).

Economists have a more balanced perspective on the likely Federal Reserve action, with a recent survey finding the vast majority anticipate a 0.25% interest rate cut at this meeting, followed by similar reductions for the rest of the year. FOMC members who have commented since recent economic reports - including employment and inflation data - did not indicate strong backing for a more substantial cut. Surveyed economists also did not forecast multiple rate reductions at upcoming meetings, suggesting recent softness does not represent an outright economic decline warranting additional easing while core inflation remains above target. After all, financial markets this year have priced in more extensive easing than the Federal Reserve ultimately implements, posing a risk for indices with highly valued stocks like the Nasdaq following the monetary policy decision.​

​Nasdaq in Long-Term Triangle?

The Nasdaq index may be developing a triangle pattern as it could not get through the 20000 mark, leaving resistance at 20760 and support at 17250. Should the price remain within this narrow range over the coming weeks or months, the pattern could end around 19000. Breaking below the 18350 regional support level may reduce the likelihood of the triangle emerging; however, it remains possible that what transpires could be one of the five typical legs seen in triangles.​

Source: SpreadEx US Tech 100

Key Takeaways

Markets are awaiting the Federal Reserve's interest rate decision this week, with uncertainty around how large the cut will be. The Nasdaq could face volatility depending on the outcome, as a more dovish stance may boost tech stocks, but a larger cut may signal economic weakness. Most analysts expect a 0.25 percentage point reduction, followed by gradual easing while noting recent data does not necessarily warrant aggressive action that could inflate valuations.