Stocks Briefly Hit Record Highs After Fed Opts For Big Interest Rate Cut—But Close Negative

Topline

Investors’ giddy reaction turned slightly negative to the hotly anticipated Federal Reserve decision to lower interest rates by 50 basis points Wednesday, as the central bank opted for the more stock-friendly route to kick off its rate cutting cycle.

Key Facts

After sitting flat as traders sat on pins and needles ahead of the 2 p.m. EDT Fed release, stocks soared, with the leading indexes S&P 500 and Dow Jones Industrial Average each setting new all-time highs minutes after the news

“With an appropriate recalibration of our policy, we can continue to see the economy grow,” Fed Chairman Jerome Powell said at a press conference, explaining the central bank’s logic in instituting a bigger cut.

But trading was choppy as investors digested the news, with the S&P’s 0.7% gain at 2:30 turning into a 0.3% loss by close, the Dow’s 0.6% rally flipping to a 0.3% dip and the tech-heavy Nasdaq’s 1.1% jump turning to a 0.3% loss.

The volatile trading came as Powell’s presser failed to sell investors on the notion the Fed is all in on a growth-friendly policy pivot, and apparently was another morsel of the buy the rumor, sell the news axiom, considering the stock market’s rally in recent weeks was built on increased bullishness about a 50 basis-point cut.

Still, most reactions from strategists indicated optimism about the Fed’s decision’s impact on stocks: “Markets can and should only celebrate today’s move,” wrote Principal Asset Management’s Seema Shah in emailed comments, predicting investors “will continue to celebrate over coming months.”

The smaller-company Russell 2000 rose about 0.2% as smaller firms are expected to be benefit more heavily from lower borrowing costs.

Key Background

Though Wall Street was all but certain the Fed would announce its first rate cut since March 2020 on Wednesday, the market was split almost down the middle on whether the Fed would cut by 25 or 50 basis points. Derivatives contracts betting on the decision indicated 40% odds of the smaller cut and 60% odds of the bigger cut Wednesday, according to CME Group data right before the announcement. The first rate cut in a monetary policy cycle has historically brought gains for stocks, as less enticing bond yields often bring new money into equities and corporate profit margins benefit from cheaper borrowing.

Big Number

34.5%. That’s how much the S&P was up from March 16, 2022, the day before the Fed hiked rates from the near-zero level they sat at since the beginning of the COVID-19 pandemic, and just before the Fed release, including reinvested dividends, according to FactSet data.

Crucial Quote

“The markets got what they wanted,” Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley, wrote in emailed comments. “Now we’ll see if [investors] remain satisfied,” continued Larkin.