US stocks rise, yields sink after Fed indicates rate cuts are coming

Several Big Tech stocks were helping to lead the market on Wednesday (Reuters file image)

Stocks are rising, and bond yields are sinking Wednesday after the Federal Reserve indicated cuts to interest rates may be coming next year. Wall Street has been craving such cuts, which can relax pressure on the economy and goose prices for investments.

The S&P 500 was 0.6% higher, up from virtually flat just before the Fed's announcement. It's within 3% of its record high, set early last year, after charging higher since October on expectations that cuts to rates are coming.

The Dow Jones Industrial Average was up 226 points, or 0.6%, as of 2:13 p.m. Eastern time, and the Nasdaq composite was 0.6% higher.

The Fed held its main interest rate steady at a range of 5.25% to 5.50%, as was widely expected. It's hiked that rate up from virtually zero early last year in hopes of slowing the economy and hurting investment prices by exactly the right amount: enough to snuff out high inflation but not so much that it causes a painful recession.

With inflation down sharply from its peak two summers ago and the economy still solid despite high interest rates, hopes have been rising that the Fed can pull off that perfect landing. Traders have built up expectations that the Fed could even begin cutting interest rates in the first half of 2024.

The Fed on Wednesday released projections from its policy makers on where they see the federal funds rate ending 2024. The median official expects it to be at roughly 4.6%. That's not as steep a cut as traders had been expecting earlier: They came into the day with a majority of bets calling for it to fall to a range of 4% to 4.25%, according to data from CME Group.

But that was still for a forecast for deeper cuts than the Fed had been forecasting three months ago.

Easier interest rates and yields help all kinds of investments, particularly those seen as the most expensive or forcing their investors to wait the longest for big growth.

Several Big Tech stocks were helping to lead the market Wednesday, continuing their massive run for the year. Apple was 1.2% higher, and Nvidia rose 1.5%.

Vertex Pharmaceuticals jumped 11.3% for one of the biggest gains in the S&P 500 after it reported encouraging data from a study for a potential pain treatment for patients with diabetic peripheral neuropathy.

They helped offset an 7.8% loss for Pfizer, which gave a revenue forecast for 2024 that was weaker than analysts expected. Much of the shortfall was due to expectations for its COVID-19 vaccine and treatment.

Tesla dropped 1.1% after recalling more than 2 million vehicles across its model lineup to fix a defective system that’s supposed to ensure drivers are paying attention when they use Autopilot.

Some economists and investors expect Fed Chair Jerome Powell to use his press conference later this afternoon to push against such hopes. He’s already said recently that it’s too early to consider when cuts to rates can come.

Wall Street wants cuts to rates and has already pushed up prices in anticipation of them because they can act like steroids for financial markets and help relax pressure on the economy and the financial system. Earlier this year, high interest rates helped lead to several high-profile collapses in the U.S. banking system.

In the bond market, the yield on the 10-year Treasury tumbled to 4.06% from 4.21% late Tuesday. The two-year yield, which moves more on expectations for the Fed, dropped to 4.53% from 4.73%.

They both had already been down modestly earlier in the morning, after a report showed that prices at the wholesale level were just 0.9% higher in November than a year earlier. That was softer than economists expected and the second-lowest such reading since inflation began exploding in early 2021.

On Wall Street, Southwest Airlines lost 4.8% after it raised its forecast for how much it will spend on fuel costs during the end of 2023.

In stock markets abroad, indexes were mixed in Europe and Asia.

Japan’s Nikkei 225 rose 0.3% after a report from the Bank of Japan showed business sentiment among major manufacturers improved.

Stocks fell more sharply elsewhere in Asia, including a 1.2% drop in Shanghai and a 0.9% decline in Hong Kong, as worries continue about the strength of China's economy, the world’s second-largest.