NEW YORK (AP) – United States (US) stocks rallied close to their records on Friday after the head of the Federal Reserve (fed) finally said out loud what Wall Street has been expecting for a while: Cuts to interest rates are coming soon to help the economy.
The S&P 500 rose 1.1 per cent after Fed Chair Jerome Powell said in a highly anticipated speech that the time has come to lower its main interest rate from a two-decade high. The index pulled within 0.6 per cent of its all-time high set last month and has clawed back virtually all of its losses from a brief but scary summertime swoon.
The Dow Jones Industrial Average rose 462 points, or 1.1 per cent, to close above the 41,000 level for the first time since it set its own record in July, while the Nasdaq composite jumped 1.5 per cent.
Powell’s speech marked a sharp turnaround for the Fed after it began hiking rates two years ago as inflation spiraled to its worst levels in generations. The Fed’s goal was to make it so expensive for US households and companies to borrow that it slowed the economy and stifled inflation.
While careful to say the task is not complete, Powell used the past tense to describe many of the conditions that sent inflation soaring after the pandemic, including a job market that “is no longer overheated”. That means the Fed can pay more attention to the other of its twin jobs: to protect an economy that’s slowing but has so far defied many predictions for a recession.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
That second part of his statement held back some of the details that Wall Street wanted so much to hear.
Treasury yields had already pulled back sharply in the bond market since April on expectations the Fed’s next move would be to lower its main interest rate. The only questions were by how much the Fed would cut and how quickly it would move.
A danger is that traders have built their expectations too high, something they’ve frequently done in the past. Traders see a high likelihood the Fed will cut its main interest rate by at least one percentage point by the end of the year, according to data from CME Group. That would require the Fed to go beyond the traditional move of a quarter of a percentage point at least once in its three remaining meetings scheduled for 2024.
If their predictions are wrong, which has also been a regular occurrence, that could mean Treasury yields have already pulled back too much since their decline began in the spring. That in turn could pressure all kinds of investments. On Thursday, for example, the S&P 500 fell to its worst loss in more than two weeks after Treasury yields climbed.
“Like usual, we will be sitting on the edge of our seats not only trying to figure out what the next data point will be, but how the Fed will interpret the data,” said Chief Economist at Annex Wealth Management Brian Jacobsen.
For Friday, at least, Powell’s speech heled lead to a widespread rally across Wall Street.
The smaller stocks in the Russell 2000 jumped 3.2 per cent to lead the market. Smaller companies can feel greater benefit from lower interest rates because of their need to borrow to grow.
In the S&P 500 index of big companies, more than 85 per cent of the stocks climbed. The strongest push upward came from Nvidia, which rose 4.5 per cent.
Its stock has been shaky this summer amid worries that investors took it and other highly influential Big Tech stocks too high in their mania around artificial-intelligence (AI) technology. But Nvidia has been charging back recently ahead of its highly anticipated profit report scheduled for next week.
Most of the other companies in the S&P 500 have been reporting better-than-expected profit so far this reporting season, as is usually the case.
Ross Stores added 1.8 per cent after topping analysts’ estimates for profit and revenue during the latest quarter.
