Investing.com -- Stocks could see some short-term volatility after the Federal Reserve rolls out an expected interest rate cut on Wednesday, but the wider trajectory of equities will likely be more impacted by upcoming economic data, according to analysts at Barclays.
The Federal Reserve is anticipated to slash interest rates for the first time since March 2020 following the conclusion of its latest two-day meeting, but the scope of the reduction remains a source of considerable uncertainty for investors.
According to CME Group's closely-monitored FedWatch Tool, the chances of a jumbo 50-basis point cut -- rather than a more traditional 25-basis point drawdown -- stand at 61%.Traders will also be hunting for any insight into how the Fed plans to approach a possible easing cycle, with markets currently expecting at least 100-basis points in cuts by the end of 2024.
"With a lot of dovishness arguably in the price now [...], the Fed's decision and its communication about the rates trajectory will likely impact short-term cross-asset volatility," the Barclays analysts said in a note to clients on Wednesday.
For stock markets, the Barclays analysts said that history suggests equities "perform better" after the Fed has kicked off an easing campaign with an initial quarter-point cut and the US economy manages to avoid tipping into a recession. However, they flagged that, when the economy has been in a downturn, stocks have fallen in the wake of the first reduction.
The analysts added that it will likely be "some time" before investors will know for certain if the economy has avoided a recession, placing extra importance on data in the months to come."We find that a reliable and timely indicator of a recession is jobless claims, which so far remain well behaved," the analysts said.
Should the numbers point to continued resilience in broader activity in the world's largest economy, they predicted that "the bulk" of a rally in defensive stocks -- which have been recently supported by concerns over a murky economic outlook -- may come to a halt. But, they noted, "history suggests [there is] no rush to re-risk."