Federal Reserve rate cut headlines dominated Wall Street on Wednesday as stocks faded from early gains and the U.S. dollar strengthened after Chair Jerome Powell poured cold water on expectations for another move in December. The central bank lowered its benchmark rate by 25 basis points and said it will end balance sheet runoff, citing limited data visibility during the government shutdown and signs that money market liquidity is tightening as bank reserves fall.
Key Points
The shift was widely expected, but investors were surprised by Powell’s pushback against the prevailing view that another cut is likely at the final policy meeting of the year. “A further reduction in the policy rate at the December meeting is not a foregone conclusion,” he said, adding that policy is “not on a preset course.” That combination—a Federal Reserve rate cut now paired with a cautious tone on next steps—sent Treasury yields higher and nudged the dollar up as equities reversed.
Derivatives pricing echoed the pivot in mood. Odds of a December move slipped from roughly 85% before the press conference to around 65% afterward, according to CME’s FedWatch Tool, as traders recalibrated their path-of-cuts assumptions. Some portfolio managers noted Powell has made a habit of curbing market enthusiasm for the next meeting immediately after each rate decision, reinforcing the Fed’s “data-dependent” stance.
How the Federal Reserve rate cut rippled across markets
- Equities: U.S. benchmarks finished off intraday highs, with the S&P 500 essentially flat, the Dow modestly lower and the Nasdaq up about half a percent. Globally, MSCI’s all-country index pulled back from a fresh intraday record while Europe’s STOXX 600 ended fractionally lower.
- Bonds: Treasury yields jumped across the curve following the Federal Reserve rate cut and Powell’s remarks, with benchmark 10-year and policy-sensitive 2-year yields posting their biggest single-day gains since early June.
- Currencies: The dollar index climbed roughly half a percent as the euro slipped, the yen weakened and sterling fell. The Canadian dollar softened against the greenback even after the Bank of Canada cut its policy rate as expected and signaled it may be near the end of its easing cycle.
- Commodities: Oil prices edged higher—WTI up about 0.6% and Brent roughly 0.8%—helped by a large draw in U.S. inventories and optimism around trade policy headlines.
Policy signals: QT pause, data visibility and liquidity
Beyond the headline Federal Reserve rate cut, the central bank flagged financial plumbing. The Fed said it will end the drawdown of its balance sheet—often called quantitative tightening—as evidence mounted that money market liquidity is tightening and bank reserves are drifting lower. Pairing a rate reduction with a QT pause underscores a desire to support smooth market functioning while keeping options open for December.
The statement also acknowledged limited data visibility amid the ongoing government shutdown. With some releases delayed or disrupted, officials emphasized reliance on a wide set of indicators—labor market trends, inflation expectations, credit conditions and real-time financial data—before deciding whether another Federal Reserve rate cut is warranted this year.
The market backdrop coming into the decision had been supportive for risk assets. U.S. stocks recently pushed to record levels, lifted by easing U.S.-China trade tensions, expectations for monetary easing, heavy AI-linked capital spending and a better-than-feared start to earnings season. Wednesday’s session showed how quickly tone can change when policy guidance tightens, even slightly.
Nvidia tops $5 trillion as AI momentum intensifies
In a separate milestone, Nvidia became the first company to cross the $5 trillion market capitalization mark. Shares rose about 3% on the day, adding to a 5% jump the prior session after CEO Jensen Huang said the company will build seven new supercomputers for the U.S. Department of Energy and highlighted roughly $500 billion in chip bookings.
The rally underscores how AI infrastructure spending continues to drive market leadership. Investors remain focused on Nvidia’s supply chain, data center demand and government-related projects that can smooth revenue visibility. At the same time, after-hours moves from other megacaps painted a mixed picture: Microsoft slipped about 3%, Alphabet gained nearly 4% and Meta fell more than 6% following their quarterly results.
While tech leadership has been pivotal for 2024’s advance, Wednesday’s action suggested a more selective tape—rewarding firms with clear AI monetization paths while penalizing those with softer guidance. Whether that persists could hinge on bond yields: higher real rates typically compress multiples for long-duration growth stocks, even when fundamentals are strong.
Policy outlook: December and beyond
Powell’s message was straightforward: a Federal Reserve rate cut today does not guarantee one in December. He reiterated the committee’s commitment to a meeting-by-meeting approach and noted that policy is calibrated to balance risks on both sides of the mandate—cooling inflation over time without unnecessarily weakening the labor market.
Rates markets took the hint. Implied odds for December shifted lower, and some managers warned that investors may be overestimating the number of cuts penciled in for next year. As one CIO put it, inflation risks further out remain nontrivial, suggesting December could prove to be the final move in this cycle if progress on prices stalls. That view contrasts with market pricing that still leans toward multiple reductions in the year ahead.
Abroad, the European Central Bank and the Bank of Japan are due later this week. Together with the Bank of Canada’s action, the global policy mix remains fluid. For multi-asset investors, the takeaway is that the Federal Reserve rate cut is only one piece of a broader central bank puzzle that will influence currencies, global yields and cross-border capital flows into year-end.
Where yields, the dollar and oil fit in
- Yields: The post-decision surge—nearly 10 basis points on both the 2-year and 10-year—was the largest since early June, reflecting reduced confidence in a near-term follow-up cut. If longer-dated yields continue to rise, equity leadership could tilt toward value, financials and cash-generative cyclicals.
- Dollar: A stronger dollar tends to tighten global financial conditions at the margin. Exporters and multinationals will watch FX effects closely as earnings season progresses.
- Oil: Crude’s uptick was driven by a sizable draw in U.S. stockpiles and incremental optimism on trade policy. Persistently higher energy prices could complicate the inflation outlook if they feed through to transportation and goods costs.
What investors are watching next
- Data flow: With some federal releases delayed by the shutdown, investors may lean more heavily on private payrolls, jobless claims, alternative inflation trackers and high-frequency spending data to gauge the need for another Federal Reserve rate cut.
- Financial conditions: The Fed’s pause on balance sheet runoff highlights sensitivity to reserve levels. Money market rates, bank funding indicators and Treasury bill dynamics will be in focus.
- Corporate earnings: Guidance from megacaps, AI infrastructure spending plans and capex outlooks will continue to shape sentiment, particularly if yields remain volatile.
- Central banks: ECB and BoJ decisions could reset global rate differentials. Any surprise would echo through FX and Treasuries, which in turn could influence the likelihood and timing of a subsequent Federal Reserve rate cut.
Investor takeaways
- The combination of a Federal Reserve rate cut and a firm message on December keeps policy optionality intact—and markets sensitive to every data point.
- Rising yields and a stronger dollar suggest a more selective equity environment; balance sheets, cash flow and pricing power matter.
- AI remains a powerful earnings tailwind. Nvidia’s $5 trillion milestone underscores durable demand, but dispersion within megacaps is widening.
- Keep an eye on liquidity. The end of QT runoff is a reminder that smooth market functioning is front-of-mind for policymakers.
Conclusion
The day’s story was one of contrasts: a Federal Reserve rate cut aimed at supporting growth and market function, set against Powell’s reminder that the path ahead is not predetermined. Stocks cooled from highs, yields climbed and the dollar firmed as traders marked down the probability of a December move. Meanwhile, Nvidia’s surge past $5 trillion reinforced the market’s conviction that AI remains a defining force for corporate investment and earnings. With major central bank decisions still to come and portions of the U.S. data calendar in flux, investors will stay attuned to every release that could tip the scales toward—or away from—another Federal Reserve rate cut.
FAQ’s
What did the Federal Reserve decide and why did it cut rates by 25 basis points?
The Fed lowered its policy rate by 25 bps and ended quantitative tightening, citing limited data during the U.S. government shutdown and signs of tightening money market liquidity as bank reserves declined.
Did Jerome Powell signal another rate cut in December?
Powell said a further reduction in December is not a foregone conclusion and policy is not on a preset course. After his remarks, the market-implied odds of a December cut fell from about 85% to around 65%, per CME FedWatch.
How did markets react to the Federal Reserve rate cut?
Stocks pared gains, with the S&P 500 finishing flat, the Dow down 0.16% and the Nasdaq up 0.55%, while global equities eased. Treasury yields jumped—the 10-year to about 4.0785% and the 2-year to 3.602%—and the dollar index rose to 99.21.
Why did Nvidia’s market cap top $5 trillion and what drove the stock?
Nvidia rose about 3% after CEO Jensen Huang announced seven new DOE supercomputers and flagged roughly $500 billion in chip bookings, extending a 5% gain the prior day; after hours, Microsoft slipped, Alphabet gained and Meta fell on earnings.
Article Source: Reuters
