Top line
Investors’ exuberant reaction to the Federal Reserve’s highly anticipated decision to cut interest rates by 50 basis points on Wednesday turned slightly negative as the central bank opted to take the more equity-friendly route to kick off its rate-cutting cycle.
Traders work on the trading floor of the New York Stock Exchange on Wednesday.
Key data
After remaining unchanged as traders sat on tenterhooks ahead of the Fed’s earnings release at 2 p.m. EDT, stock prices rose sharply, with the leading S&P 500 and Dow Jones Industrial Average indexes each hitting new all-time highs minutes after the news was released.
“With an appropriate reorientation of our policies, we can continue to experience economic growth,” Fed Chairman Jerome Powell said at a press conference, explaining the central bank’s logic behind a sharper interest rate cut.
But as investors digested the news, trading was choppy: The S&P’s 0.7 percent gain at 2:30 a.m. turned into a 0.3 percent loss by close, the Dow’s 0.6 percent rise turned into a 0.3 percent decline, and the tech-heavy Nasdaq turned from a 1.1 percent gain to a 0.3 percent loss.
The volatile trading was due to Powell’s press conference failing to convince investors that the Fed is fully committed to a pro-growth shift in monetary policy. This was seemingly further proof of the “buy the rumor, sell the news” axiom, given that the stock market’s recovery in recent weeks has been based on increasing optimism about a 50 basis point rate cut.
Still, most strategists’ reactions reflected optimism about the Fed’s impact on equity markets: “Markets can and should only celebrate today’s move,” wrote Seema Shah of Principal Asset Management in an emailed commentary, predicting that investors “will continue to celebrate in the months to come.”
The Russell 2000 index of small companies rose about 0.2%, as smaller companies are expected to benefit more from lower borrowing costs.
Important background
Although While Wall Street was all but certain that the Fed would announce its first rate cut since March 2020 on Wednesday, the market was nearly split on whether the Fed would cut rates by 25 or 50 basis points. Derivatives contracts speculating on the decision suggested a 40% chance of a smaller cut and a 60% chance of a larger cut on Wednesday, according to data from CME Group shortly before the announcement. The first rate cut in a monetary policy cycle has historically delivered gains for stocks, as less attractive bond yields often draw new money into stocks and corporate profit margins benefit from cheaper credit.
Large number
34.5%. That’s how much the S&P has risen since March 16, 2022, the day before the Fed raised interest rates from the near-zero level they had been at since the start of the COVID-19 pandemic and just before the Fed released rates including reinvested dividends, according to FactSet data.
Key quote
“The markets got what they wanted,” wrote Chris Larkin, managing director of trading and investments at Morgan Stanley’s E*TRADE, in an emailed comment. “Now we’ll see if (investors) remain satisfied,” Larkin continued.
For detailed information on the impact of interest rate cuts on your finances, see Here.
