Fed’s rate cut fails to buoy markets

Rate Cut
Rate Cut

The Federal Reserve delivered a substantial interest rate cut on Wednesday, lowering its overnight lending rate by 50 basis points to a range of 4.75% to 5.00%. This marks the central bank’s first rate cut in four years as inflation levels ease. The larger-than-expected move initially sent stocks soaring, with the Dow Jones Industrial Average gaining as much as 375.79 points.

However, the rally fizzled out by the end of the trading session, with the Dow closing down 103.08 points, or 0.25%, at 41,503.10. The S&P 500 and Nasdaq Composite also ended the day in the red, falling 0.29% and 0.31%, respectively. In its statement, the Federal Reserve expressed greater confidence that inflation is moving sustainably toward its 2% target and that the risks to achieving its employment and inflation goals are roughly balanced.

The aggressive 0.50% cut suggests the Fed is comfortable with the downward trends in inflation and may now be shifting its focus to avoid causing economic stress by keeping rates too high for too long, according to Philip Straehl, Chief Investment Officer at Morningstar Wealth. Federal Reserve Chair Jerome Powell attempted to calm concerns during a post-meeting press conference, stating that the aggressive cut was due to a reduction in upside risks to inflation.

Fed’s unexpected rate cut impact

He also noted that he does not see anything in the economy that suggests an elevated likelihood of a downturn. However, his comments failed to sustain the initial gains in stock prices, partially due to the sizable rally leading up to the much-anticipated cut. Bank stocks hit session highs following the Fed rate cut, with Bank of America rising 2.4% and ServisFirst Bancshares and Glacier Bancorp each gaining more than 4%.

The Homebuilders ETF also jumped to a fresh record high on expectations of lower mortgage rates. Meanwhile, Bitcoin held steady at $60,000, as easing monetary conditions are historically positive for the cryptocurrency in the medium term. Brian Belski, an analyst at BMO Capital Markets, believes that rate cuts are good news for growth stocks, particularly in the tech sector.

He expects equity gains to broaden, with growth stocks, especially in technology, rising further as the artificial intelligence growth story shows no signs of ending for now. Among individual stocks, Astra Space shares soared 51% after receiving a contract from NASA, while U.S. Steel shares jumped more than 2% following news that a U.S. security panel asked the company to refile its plans to purchase the firm for $14.1 billion.

Maya Johnson

Maya is the editor-in-chief of KillerStartups.com. She provides value to early-stage entrepreneurs through content and her weekly newsletter. Reach her at maya@killerstartups.com

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