Wall Street rallies after Federal Reserve cuts interest rates 50 bps

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US stocks shot higher on Wednesday after the Federal Reserve cut interest rates by 50 basis points, the high side of estimates for its first cut in more than four years.

Citing a "greater confidence" that inflation is moving towards the central bank's 2% target, the Fed cut rates by half of a percentage point, as it now focuses on keeping the labor market healthy.

"The Fed ended the pause with a bang. It’s a strong signal that they cut by 50 bps and expect another 50 basis points of cuts this year," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The Fed is projecting that by front loading the cuts they can stick the landing with the unemployment rate at 4.4% and inflation dropping to target quickly." Market expectations for the size of the rate cut had been volatile in recent days, pricing in about a 65% chance for a 25 basis point cut last week to a 57% chance for the larger 50 basis point cut earlier on Wednesday, according to CME's FedWatch Tool.

Borrowing costs had been parked at their highest levels in over two decades since July 2023, when the central bank last hiked interest rates by 25 basis points to between 5.25% and 5.50% to combat inflation.

The Dow Jones Industrial Average rose 165.62 points, or 0.40%, to 41,771.80, the S&P 500 gained 29.06 points, or 0.52%, to 5,663.64 and the Nasdaq Composite gained 139.26 points, or 0.79%, to 17,767.32.

Smallcap stocks, seen as more likely to benefit from a lower interest rate environment, moved higher, with the Russell 2000 up more than 1%.

Markets have rallied this year, with all three major indexes setting record highs on prospects of lower interest rates as inflation moderated and the jobs market showed gradual signs of cooling.