Wall Street’s main indexes soared on Sept. 19, a day after the Federal Reserve delivered an outsized interest-rate cut, with the Dow Jones Industrial Average and the benchmark S&P 500 Index both setting new all-time highs at closing bell.
The stock rally came amid a broader risk-on pulse in markets on Sept. 19, as investors digested the news of a 50 basis-point interest-rate cut by Fed policymakers, who indicated more reductions to come.
“The market zipped up immediately on the announcement yesterday, came back down when chairman [Jerome] Powell had his press conference and really ended the day flat,” Liz Miller, president of Summit Advisors, said. “So, overnight, we got some euphoria back in. And I think it’s just the feeling and the confirmation that the Fed has pivoted.”
Major cryptocurrencies also saw significant gains, with Bitcoin, the most popular cryptocurrency, pushing 5.4 percent higher, to $63,524, as of the time of reporting.
The small-cap Russell 2000 Index rose by 2.1 percent, as lower interest rates boosted prospects of lower operating costs and bigger profits—especially in light of the Fed’s bigger-than-expected 0.50 percentage-point rate reduction.“Making that move to 50 instead of 25 can have some real ramifications in the economy, and we already saw it this morning as we saw mortgage rates come down a little bit. So that is meaningful,” Miller said.
On Sept. 18, after the central bank’s rate-setting committee voted to cut rates by 50 basis points, Federal Reserve chair Jerome Powell said that the decision was intended to support a cooling job market. He said that the balance of risks had shifted from concerns about higher inflation to the growing threat of rising unemployment.
“This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation, moving sustainably down to 2 percent,” he said at a news conference in Washington.
Powell also said that he doesn’t see the Fed’s policy rate returning anytime soon to the sub-2 percent levels that were the norm for years before the central bank embarked on its most recent hiking cycle in 2022, in response to multi-decade high inflation.
“If the economy evolves as expected, the median participant projects that the appropriate level of the federal funds rate will be 4.4 percent at the end of this year and 3.4 percent at the end of 2025,” Powell said.
While this means that the ultra-low mortgage rates of yesteryear aren’t coming back in the near term, the rate cut is likely to start to lower some financial pressures, as the Fed’s broader pivot into an easing cycle sends borrowing costs on a downward trajectory.
Even though hiring and wage growth have slowed, Powell said he doesn’t believe there’s reason to think that the economy will tip into a recession.
“I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn is elevated. OK? I don’t see that,“ he said at the news conference. ”You see growth at a solid rate, you see inflation coming down, and you see a labor market that’s still at very solid levels.”
In a sign that the labor market has, as Powell said, managed to withstand the current high-interest rate environment without major buckling, the latest weekly jobless claims report from the Department of Labor showed that the number of Americans filing new applications for unemployments benefits last week dropped to a four-month low.
“These hard numbers confirm the message delivered by Fed chair Powell yesterday,” Carl Weinberg, chief economist at High Frequency Economics, said. “The labor market is softening but not imploding as you would expect in a recession.”
Analysts at ING said in a note that the risks facing the U.S. economy are stacked in the direction of the Fed cutting more aggressively going forward.
“Our forecasts are broadly in line with what the Fed is indicating: get rates down to 3.5 [percent] or a bit below by next summer on the basis that prompt action from the Fed allows the U.S. economy to avoid recession just as it did in the mid-1990s under Alan Greenspan,” the analysts wrote.
“That view still holds, but we certainly acknowledge that the jobs market outlook is more concerning and the risks are indeed skewed to the Fed having to do more, more quickly.”
