The Federal Reserve officially kicked off an easing cycle with a massive 50 basis point interest rate cut, well above the 25 basis point cut expected by financial markets.

Although the decision was not unanimous with dissent within the commission for the first time since 2005, chairman Jerome Powell said the economy was “generally good”, the labor market was in “solid shape” and the unemployment rate was “very healthy”.

Dismissing rumors of a weakening U.S. economy, Powell framed the rate cut as a sign of growing confidence in controlling inflation, a safeguard against job losses and a bold commitment to ensure the Fed doesn’t get “behind the curve.”

The Fed's goal going forward, he said, is to keep inflation steady while ensuring unemployment rates don't rise.

While widely expected for September, the Fed's first interest rate cut in years sparked intense debate, with only 1 in 10 economists polled by Bloomberg correctly predicting the 50 basis point move. Most Fed watchers believed the continued strength of the economy justified a cut of just 25 basis points.

For Seema Shah, chief global strategist at Principal Asset Management, the Fed's decision to go big is a "unique move in history."

"There is no financial crisis brewing, no asset price bubble bursting, no job losses and a stock market that is already up about 18 percent year-to-date. Powell's positive reading of the economy makes the decision even more confusing,” she said.

"However, from an investor's perspective, the key takeaway from today's decision is that this Fed will go to historic lengths to avoid a hard landing." With a series of rate cuts, the risk of a recession has collapsed.”

Proposals are that the Federal Open Market Committee (FOMC) will cut another 50 basis points between now and the end of the year and another 100 basis points in 2025 before making a final move of half a point in 2026 to raise the interest rate between 2.75 and 3 percent.

Still, Powell emphasized the Fed's flexibility, making it clear that if the economy remains resilient or inflation remains sticky, they will take a more cautious approach to cutting rates.

He further added, "Intuitively, most -- many, many people anyway -- would say that we're probably not going to go back to that era where there were trillions of dollars of Treasuries trading at negative interest rates, long-term bonds trading at negative interest. "

Financial markets initially reacted to the FOMC's decision with a cautious increase in risk appetite - the bond curve steepened as two-year bond yields edged lower and 10-year yields rose, while stocks rose modestly.

However, as the day unfolded, the curve continued to steepen as two-year yields and equity markets gave up their early gains.

Addressing these market changes, GSFM investment specialist Stephen Miller pointed to continued inflation concerns and looming challenges posed by the US's "huge" budget deficit. He highlighted the lack of any concrete plans from either political party to deal with its far-reaching consequences.

"This raises the question of whether bond yields could rise significantly -- certainly longer-dated bond yields -- even though the Fed is in easing mode as markets suffer indigestion over the requirements to finance those deficits by issuing record bonds,” Miller said.

"It could also be said that markets are currently pricing in a very bullish scenario, and not only may markets be vulnerable to downside risks, but they've reached a point where they're hard-pressed to appreciate any more good news."

Looking ahead, Shah sees reduced recession risk as a promising sign for risk assets.

"History shows that the Fed's success in piloting a soft versus hard landing will play a key role in determining the path for US stocks." During easing cycles where recession has been avoided and earnings growth remains relatively stable as a result, capital markets tend to respond positively,” she said.

"Since 1985 five of the best 10 years for the S&P 500 came when the Fed was cutting interest rates without a recession. The historical perspective should give investors some optimism about the future of the market.”

Chris Galippo, senior market strategist at the Franklin Templeton Institute, agreed that history points to a strong run ahead for the S&P 500.

"History tells us that when the Fed cuts interest rates in an economic expansion, the S&P 500 rises an average of 16.66% in the 12 months after the initial rate cut," Galippo said.

“Since 1990, when the Fed cut interest rates, large-cap and small-cap growth generated the strongest performance in the 12 months following the initial rate cut.

"As a result, we view any pullback as a buying opportunity."

Can the Fed inspire the RBA?

The government quickly quelled speculation of a similar move by the Reserve Bank next week.

Speaking to the media on Thursday, Treasurer Jim Chalmers said: "It's really important to remember that interest rates have risen more in the US than in Australia, and even after this cut in overnight rates in the US, interest rates are still higher in the US than they are here.

"When the Reserve Bank meets next week, they will be considering a whole range of things, including this, but they will be mainly focused on inflation, as the government is."

Also in the media Thursday, Prime Minister Anthony Albanese noted that the U.S. is cutting rates because of a sluggish economy.

“Inflation has peaked higher in the United States and interest rates have peaked higher in the United States than here. They cut off a higher percentage. Here we peak at 4.35.

“In most of the Western world, it exceeds 5 percent and much more. And that's what they dealt with after that – in places like the UK, we had inflation that was in double digits. So what we've done is try to manage the economy in a way that takes care of people along the way."

Chalmers and Albanese were not the only ones to temper expectations for the RBA, reflecting the Fed's rate cuts. Traders also cut their rate cut forecasts, with bond markets now pricing in a 79% chance of a cut by Christmas, down from 85% on Wednesday.

Markets are currently pricing in just a 10 percent chance of a rate cut at next week's RBA meeting.