The Dow Jones Industrial Average experienced an uptick on Wednesday following the Federal Reserve’s decision to implement another interest rate cut this year, with traders increasingly speculating on further easing measures anticipated for the next year. The 30-stock average increased by 497.46 points, representing a rise of 1.1%, concluding at 48,057.75. The S&P 500 advanced 0.7% to conclude the day at 6,886.68, momentarily surpassing its prior record closing high of 6,890.89, while the Nasdaq Composite rose by 0.3%, reaching a level of 23,654.16. The Federal Reserve sanctioned an additional quarter percentage point reduction at the end of its two-day policy deliberation, the third consecutive adjustment, positioning the federal funds rate within a range of 3.5%-3.75%.
Several elements were perceived as favorable for equity markets in the Federal Reserve’s communication, along with Chair Jerome Powell’s ensuing comments. Notably, the Fed announced it would begin purchasing short-term bonds, thereby expanding its balance sheet, and short-term Treasury yields experienced a decline as a consequence. The central bank also acknowledged the weak labor market in its statement, eliminating the phrase that it “remained low,” indicating a shift in focus towards bolstering the economy rather than prioritizing inflation control. Powell indicated that the Fed would need to “wait and see” prior to determining its subsequent action, while simultaneously dismissing the likelihood of a rate increase in the near term, stating, “I don’t think that a rate hike … is anybody’s base case at this point.”
Conversely, the Federal Reserve anticipates merely a single rate reduction in 2026, yet market participants speculate on a more aggressive approach, indicating that fed funds futures are reflecting a probability exceeding 77% that the central bank will implement two additional rate cuts in the coming year. “A lack of deeper reductions could have been interpreted poorly by market participants, but news that the balance sheet will begin expanding again, albeit slowly, is certainly a reason to get excited and more than offset the concerns of limited benchmark trims ahead,” said José Torres, senior economist at Interactive Brokers. “Furthermore, the dots indicated stronger growth forecasts, lighter inflation expectations, and neutral employment outlooks, developments that are also fostering a bullish response in both stocks and yields.”
On October 29, following the most recent record close for the S&P 500, the Federal Reserve implemented a rate cut; however, Powell indicated that a further reduction in December was not guaranteed. The announcement led to a decline in stock prices that day, initiating a challenging period for equities throughout much of November, until certain members of the Federal Reserve began to indicate that a rate cut in December might be forthcoming, and the benchmark has subsequently returned to its original position. “The final interest rate decision of 2025 has effectively set the stage for a Santa Claus rally to conclude the year, with the S&P 500 likely to surpass the 7,000 milestone in the coming weeks,” Torres stated.