Fed Chair Jerome Powell Just Implemented a 'Risk Management' Rate Cut. Will This Push the S&P 500 Index to 7,000 or Is It a Sell-the-News Event?

Key Points

• Fed Chair Jerome Powell called the Fed's decision a "risk management cut" in case the economy suddenly slows significantly.

• The stock market has been banking on interest rate cuts for months now, pushing up the broader S&P 500 index.

• Interestingly, the Federal Open Market Committee's dot plot left many investors scratching their heads.

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As expected, the Federal Open Market Committee (FOMC) lowered the Federal Reserve's benchmark federal funds rate by a quarter point at its September meeting, bring the federal funds rate down inside a range of 4% to 4.25%.

While the decision was not surprising, investors were more interested in other parts of the meeting. The FOMC unveiled the Fed's latest dot-plot, showing where members of the FOMC expect the federal funds rate to trend in the future, and Fed Chair Jerome Powell held his regular post-meeting press conference, during which Powell called the Fed's most recent action a "risk management cut."

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The stock market was certainly volatile following these events. Will this recent news push the broader benchmark S&P 500 index to 7,000 or is this a sell-the-news event?

Image source: Getty Images.

A lot to digest

As many are aware, the Fed has been in a holding pattern all year because both parts of its dual mandate -- stable prices and maximum employment -- have been largely at odds with one another. Unemployment has ticked up, as cracks in the labor market have become more apparent, while inflation has begun rising again, moving away from the Fed's 2% preferred target. Meanwhile, President Donald Trump's tariffs have complicated the situation because it is unclear just how much they will raise inflation. Cutting interest rates will help the labor market, but could raise inflation further.

Over the past month, it became clear that the Fed, or at least certain members of the FOMC, were going to prioritize the labor market at the September meeting, which is why the quarter-point cut came as no surprise. At the press conference, Powell called the Fed's recent cut a "risk management cut," indicating the Fed essentially wants to hedge its bets in case the economy were to slow down significantly.

The FOMC also noted in its post-meeting statement that, "Job gains have slowed, and the unemployment rate has edged up but remains low." They also observed moderation in economic activity and said inflation "has moved up and remains somewhat elevated."

Interestingly, the Fed dot plot, which shows how each member of the FOMC expects rates to trend in the future, varied much differently from the market's expectations. The majority of FOMC members expect two more interest rate cuts in 2025, one more than expected by the market. However, the dot plot now only expects one rate cut in 2026 and for the federal funds rate to end 2026 around 3.4%. Heading into the meeting, traders betting on changes to the federal funds rate thought interest rates could end 2026 below 3%.

So, while the meeting may have appeared dovish, it had more of a hawkish undertone. It's important to note that there is plenty of division in the Fed's dot plot, so the FOMC is torn, which makes sense when you consider how the two aspects of the dual mandate are at odds with one another.

Will this push the S&P 500 to 7,000?

As of this writing, the S&P 500 traded around 6,600, so 7,000 is certainly in reach. On one hand, the market is disappointed by the dot plot, which suggests the Fed may not lower interest rates as much as expected. On the other hand, this could also suggest that the Fed is not as worried about the economy as investors thought if they don't see the need for as many rate cuts as the market was baking in between now and the end of 2026.

It's all going to come down to how inflation data continues to trend for the rest of the year. The Fed is trying to avoid a stagflationary scenario that involves higher unemployment, while consumer prices remain high as well. The labor market has clearly softened to a point where it is no longer driving inflation higher, and therefore, the Fed wants to protect and stop it from softening further. The risk in hindsight is that the Fed waited too long to cut rates this year, and the damage is already done.

It's difficult to predict the near-term future, but I think the market could still hit 7,000 over the next six months if inflation remains contained and doesn't show any significant increases. Then, at least if the labor market and economy slow, the Fed can cut rates without concerns over stagflation. If inflation continues to move steadily higher, the market may struggle because more rate cuts could exacerbate inflation further.

Ultimately, investors can still invest in the S&P 500, although with the index trading near all-time highs, it's still a good idea to practice dollar-cost averaging to smooth your cost basis over time.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.