By Chuck Mikolajczak
NEW YORK (Reuters) -U.S. stocks briefly shot higher on Wednesday after the Federal Reserve cut interest rates by 50 basis points, the high side of estimates for its first cut in more than four years.
Citing a “greater confidence” that inflation is moving toward the central bank’s 2% target, the Fed cut rates by half of a percentage point, as it now focuses on keeping the labor market healthy.
Trading was choppy. Prior to the announcement, the S&P 500 oscillated between modest gains and losses. The benchmark rose as much as 1% after the announcement before paring gains.
“The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 bps and expect another 50 basis points of cuts this year,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“The Fed is projecting that by front loading the cuts they can stick the landing with the unemployment rate at 4.4% and inflation dropping to target quickly.”
Market expectations for the size of the rate cut had been volatile in recent days, pricing in about a 65% chance for a 25 basis point cut last week to a 57% chance for the larger 50 basis point cut earlier on Wednesday, according to CME’s FedWatch Tool.
The Dow Jones Industrial Average rose 103.40 points, or 0.25%, to 41,709.58, the S&P 500 gained 22.31 points, or 0.40%, to 5,656.89 and the Nasdaq Composite gained 132.71 points, or 0.75%, to 17,760.77.
Borrowing costs had been parked at their highest levels in over two decades since July 2023, when the central bank last hiked interest rates by 25 basis points to between 5.25% and 5.50% to combat inflation.
After the rate cut announcement, Fed Chair Jerome Powell said the central bank’s forecast for the path of interest rates did not imply the need for urgent action.
Markets are now fully pricing in a cut of at least 25 basis points at the Fed’s November, meeting with a roughly 40% chance for another 50 basis point cut.
Small cap stocks, seen as more likely to benefit from a lower interest rate environment, moved higher, with the Russell 2000 up about 2%. Regioanl banks, some of which had been stressed by higher interest rates, also gained ground, with the KBW Regional bank index up 2.35%.
Markets have rallied this year, with all three major indexes setting record highs on prospects of lower interest rates as inflation moderated and the jobs market showed gradual signs of cooling.
Intuitive Machines surged 44% after clinching a $4.8 billion navigation services contract from NASA.
Advancing issues outnumbered decliners by a 2.65-to-1 ratio on the NYSE and by a 2.25-to-1 ratio on the Nasdaq
The S&P 500 posted 42 new 52-week highs and no new lows while the Nasdaq Composite recorded 159 new highs and 49 new lows.
(Reporting by Chuck Mikolajczak; Editing by David Gregorio)