Chart of the week: Don't Stop

Last week, senior figures at the US Federal Reserve faced a tricky decision: should they cut interest rates by 0.25% or go for 0.5%?

Cut too little, and investors might feel it’s not enough to support growth or stave off a future recession. Cut too much, and they could think the Fed knows something ominous that the rest of us don’t.

Trying to anticipate how investors will react to a rate cut is a complex business. The table below shows possible explanations for markets rising or falling after a hypothetical 0.25% or 0.5% rate cut.

It’s like driving down the motorway – if you slow down too sharply, everyone wonders if there’s trouble ahead. But slow down just right, and the drive stays smooth.

That’s essentially what Fed Chairman Jerome Powell did with the 0.5% rate cut. Historically, such a large cut signals recession fears, but Powell made a credible case for why this was different. The US economy isn’t collapsing: unemployment is still low at 4.2% and GDP growth is a steady 2.2%. Powell didn’t slam on the brakes. Instead, he recalibrated – adjusting just enough to support the economy while keeping things calm.

The problem? Markets are hypersensitive. A big rate cut often feels like brake lights coming on, causing investors to panic. Powell’s job was to assure them this was a tweak, not a red flag. Yes, labour market data is softening, but it’s not in freefall. This cut was a way to stay ahead of potential issues, not a reaction to a crisis.

Key Takeaway: By cutting now and signalling further reductions are to come, Powell gave the markets a steady path forward: slow, measured adjustments. This reassured investors that the Fed is still in control, aiming for a soft landing rather than an abrupt stop.

The markets liked what they heard, with stocks moving higher following the announcement.

In the end, it’s the direction of travel, not the speed, that matters most. With rate cuts now underway, sectors like long-duration bonds, small-caps and infrastructure are set to benefit.

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