Stocks Hit Record Highs as Fed Rate Cut Fuels Broad Rally

The stock market continued its record-setting run last week with the Dow, the S&P 500 and the NASDAQ each reaching new record highs. The small caps of the Russell 2000 also hit a new high for the first time in four years, which signaled a broadening of the rally beyond tech stocks. The major impetus for last week’s market performance was the Federal Reserve’s decision to trim interest rates for the first time this year. In addition, the Fed projects that more rate cuts are possible before the end of this year, which investors view as a positive for economic growth and corporate earnings. While inflation appears to have moderated somewhat, the Fed’s challenge is to support a cooling job market without reigniting inflationary pressures. The interest rate cut also influenced the bond market, with 10-year Treasury yields ticking higher as bond prices declined. Crude oil prices fell on concerns about waning global demand, abundant supplies and implications from the aforementioned interest rate cut.

Fed Cuts Rates 25 Basis Points as Growth Slows; Signals Further Easing

As expected, the Federal Open Market Committee cut the federal funds rate by 25 basis points, bringing the range to 4.00%-4.25%. This reduction is the first since December and was nearly unanimous, with newly appointed Governor Stephen Miran favoring a 50-basis-point decrease. In reaching its decision, the Fed noted that growth of economic activity moderated in the first half of the year, while job gains have slowed and the unemployment rate edged up but remained low. Inflation remained somewhat elevated. The Committee indicated that uncertainty about the economic outlook remained heightened, while the downside risks to employment have risen. The Fed expects to lower interest rates by another 50 basis points by the end of 2025 and by 25 basis points in 2026, slightly more than projected in June.

Eye on the Week Ahead

There’s plenty of economic data available this week covering several sectors. The latest information on sales of existing and new homes is out this week. The final estimate for the second quarter gross domestic product is also available later in the week. Data on inflation closes out the week with the release of the personal consumption expenditures price index for August.