Stocks Soar as Fed Puts Wall Street’s Rate Cut Wish on the Table

(Bloomberg) -- Buy signals flashed across Wall Street Wednesday as traders grew optimistic about rate cuts coming soon after Federal Reserve Chair Jerome Powell left the door open to lowering borrowing costs at the central bank’s next meeting in September.

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The S&P 500 Index jumped 1.6%, powered by gains in rate-sensitive technology stocks like Nvidia Corp., Apple Inc. and Amazon.com Inc. — marking the index’s best “Fed Day” session since July 2022, according to data compiled by Bloomberg. The Nasdaq 100 Index soared 3%, its biggest gain since February. Both indexes shot higher during Powell’s press conference and then pared some of those gains after he stopped speaking.

“Investors are taking comfort in Powell’s repeated assertion that there’s room to respond by cutting rates if there’s further weakness in the labor market,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “A September rate cut looks like a lock unless something unexpected happens. The feeling now is the Fed has the market’s back over the next year, with rates in a downward trajectory — which is a boon for stocks.”

Fed swaps are now fully pricing in a quarter-point rate reduction in September after Powell said a reduction in borrowing costs cuts could happen as soon as the central bank’s next rate decision on Sept. 18 — if the economic data allowed, with officials highlighting tentative signs of cooling inflation and a moderation in wage growth while US employment creeps higher.

“If we were to see, for example, inflation moving down quickly — or more or less in line with expectations — growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting,” Powell said at his press conference in Washington after the rate decision was announced.

That said, traders weren’t as enthusiastic about funneling money into small caps and other previously unloved corners of the market that had spurred a powerful rotation this month and helped broaden market breadth, including small-capitalization stocks that were already on a tear in anticipation officials would indicate a reduction in borrowing costs was coming soon.

The Russell 2000 Index and the S&P 500’s equal-weighted index that strips out market-cap bias both pared early gains to rise just 0.5%.

Traders stepped up their rotation out of Big Technology shares and into everything from small-cap stocks to value plays this month, starting after a cooling print on consumer prices on July 11 in anticipation the Fed is about to begin a rate reduction cycle.

Investors are now awaiting further signals from Fed officials on whether the market’s aggressive dovish bid is overdone after US labor costs rose less than forecast in the second quarter. Meanwhile, the central bank’s preferred measure of underlying US inflation — the so-called core personal consumption expenditures price index — rose at a tame pace in June, near the Fed’s 2% target.

Powell’s address at the Fed’s Jackson Hole economic symposium in late August could offer traders to clues on the central bank’s planned interest rate path.

“Markets still believe officials will cut rates in September because a failure to do so would leave the next opportunity in December after the election,” said Scott Colyer, chief executive at Advisors Asset Management. “And that’s just too long to wait with unemployment rising.”

(Updates percentages throughout to closing levels.)

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