Stocks of smaller companies helped lead the market, as did other businesses that can feel the most relief from lower interest rates. The Russell 2000 index of smaller stocks soared 2%. The moves followed rallies for markets across Europe and Asia after the Federal Reserve delivered the first cut to interest rates in more than four years on Wednesday.
It was a momentous move by the Fed, closing the door on a run where it kept its main interest rate at a two-decade high in hopes of slowing the U.S. economy enough to stamp out high inflation. Now that inflation has come down from its peak two summers ago, Chair Jerome Powell said the Fed can focus more on keeping the job market solid and the economy out of a recession.
Wall Street’s initial reaction to Wednesday’s cut was a yawn, after markets had already run up for months on expectations for coming reductions to rates, and stocks ended up edging lower after swinging up and down a few times.
“Yet we come in today and have a reversal of the reversal,” said Jonathan Krinsky, chief market technician at BTIG. He said he did not anticipate such a big jump for stocks on Thursday.
Some analysts said it could have been relief that the Fed’s Powell was able to thread the needle in his press conference and suggest the deeper-than-usual cut was just a “recalibration” of policy and not an urgent move that it had to take to prevent a recession.
The job market has already begun to slow under the weight of higher interest rates, and some critics have said the Fed waited too long to cut rates and may have done damage to the economy.
Powell, though, said Fed officials are not in “a rush to get this done” and would make decisions on policy at each successive meeting depending on what the incoming data says.
Some investment banks raised their forecasts for how much the Federal Reserve will ultimately cut interest rates, anticipating even deeper reduction than Fed officials. Federal Reserve officials on Wednesday released forecasts showing they expect to cut interest rates by potentially another 1.5 percentage points over 2024 and 2025. At Bank of America, economists are expecting 2 percentage points.
Lower interest rates help financial markets in two big ways. They ease the brakes off the economy by making it easier for U.S. households and businesses to borrow money, which can accelerate spending and investment. They also give a boost to prices of all kinds of investments, from gold to bonds to cryptocurrencies. Bitcoin rose 3% Thursday.
An old adage suggests investors should not “fight the Fed” and should ride the rising tide when it’s cutting interest rates, and Wall Street was certainly doing that Wednesday. But this economic cycle has continued to break norms and conventional wisdoms after the COVID-19 pandemic created an instant global recession and then the worst inflation in generations.
One of the worries still remaining on Wall Street is that inflation could remain tougher to fully subdue than in the past. And while lower rates can help goose the economy, they can also give inflation more fuel.
Economic reports released Thursday suggested an economy that remains solid, at the least. One said fewer workers applied for unemployment benefits last week. It’s another signal that layoffs across the country remain low and companies are holding onto workers, even if they’re not hiring as many new ones as earlier.
A separate report said manufacturing in the mid-Atlantic region returned to growth. Manufacturing has been one of the areas of the economy hurt most by high interest rates, but the Philadelphia Fed index was a touch weaker than expected.
In the bond market, the yield on the 10-year Treasury rose to 3.75% from 3.71% late Wednesday.
In stock markets aboard, indexes jumped 2% in France, 2.1% in Japan and 2% in Hong Kong.
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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.
