U.S. stocks rallied close to their records on Friday after Federal Reserve Chair Jerome Powell announced that cuts to interest rates are coming soon to help the economy. The S&P 500 rose 1.1% and came within 0.6% of its all-time high. The Dow Jones Industrial Average also surged, closing above the 41,000 level for the first time since July. Powell’s speech marked a significant turnaround for the Fed, which had been hiking rates for the past two years to combat rising inflation. Now, with the job market no longer overheated, the Fed can focus on protecting the economy.
While Powell hinted at upcoming rate cuts, he did not provide specific details, leaving Wall Street eager for more information. Traders have already anticipated the Fed’s next move by lowering Treasury yields since April. The expectation is that the Fed will cut its main interest rate by at least 1 percentage point by the end of the year. However, if these predictions are wrong, it could put pressure on various investments. Despite the uncertainty, Powell’s speech led to a widespread rally across Wall Street, with small-cap stocks in the Russell 2000 leading the market.
Smaller companies, which can benefit more from lower interest rates, saw a significant jump, with more than 85% of the stocks in the S&P 500 index of big companies climbing. Tech giant Nvidia experienced a 4.5% increase in its stock price ahead of its profit report. Most companies in the S&P 500 have been reporting better-than-expected profits during the current reporting season, although concerns about inflation persist among CEOs. Red Robin Gourmet Burgers reported a worse loss than expected, reflecting a slowdown in the restaurant industry. Overall, the S&P 500, Dow Jones, and Nasdaq composite all posted gains on Friday.
In the bond market, the yield on the 10-year Treasury fell, indicating expectations for Fed action. Stocks markets abroad also saw modest gains, with indexes in Europe rising after a mixed performance in Asia. In Tokyo, the Nikkei 225 added 0.4% after the Bank of Japan hinted at gradual rate increases. The Bank of Japan had previously caused a market selloff with a rate hike, but calmed conditions by assuring that it would not raise rates again as long as markets were unstable. Analysts are closely monitoring the ongoing economic situation and the impact of potential rate cuts on global markets.
Powell’s announcement regarding upcoming rate cuts reflects the Fed’s shift towards prioritizing economic growth over inflation control. This move comes after months of anticipation on Wall Street and could have significant implications for various sectors of the economy. While traders have already priced in some of these expectations, the exact extent and timing of the rate cuts remain uncertain. As markets continue to react to new economic data, Powell’s speech has provided some clarity to investors but has also raised new questions about the future direction of monetary policy.
