Markets Rally as Fed Cuts Rates, Signals Patience on Future Moves

Markets finished broadly higher Wednesday after the Federal Reserve delivered its third rate cut of the year and signaled a steady-hand approach going forward. While the Fed stuck with its “hawkish cut” tone, Chair Powell’s comments leaned more market-friendly than feared, downplaying the risk of future hikes and reinforcing a data-dependent stance. Stocks climbed across the board, with small caps leading and the S&P 500 just shy of a record high. Bonds also rallied as yields retreated, and the dollar weakened amid expectations that the Fed will remain cautious heading into a leadership transition.

Key Headlines & Market Movers:

• Fed Delivers a “Hawkish Cut” but Market Hears Dovish Undertones: The Fed lowered the policy rate by 25bps to 3.5%-3.75%, meeting expectations, and authorized new Treasury purchases to support liquidity. While Powell reiterated that the move was a “prudent adjustment” rather than the start of a new easing cycle, he emphasized the flexibility to adapt policy as data evolves. Markets interpreted his tone as leaning dovish, particularly as he ruled out rate hikes and noted inflation likely would’ve already returned to the low-2% range without tariff-related distortions.

Bonds and Equities Climb on Policy Clarity and Lower Yields: The 10-year Treasury yield fell to 4.14%, reversing earlier highs near 4.21%, as investors responded to Powell’s more tempered tone and lack of pushback against future rate cuts. Equities surged, especially small caps, which hit a record as investors rotated into rate-sensitive areas. Powell’s acknowledgment of softening labor dynamics and his reassurance on inflation gave markets confidence in a continued supportive environment.

• Market Cautious on 2026 Outlook, Fed Transition Adds Uncertainty: Despite the Fed projecting just one cut in 2026, futures markets still price in two, reflecting skepticism about the Fed’s dot plot amid an upcoming leadership change. Comments from strategists highlighted the growing disconnect, with many expecting slower labor markets and fading inflation to eventually force more accommodation, regardless of current guidance.

GE Vernova Surges, Oracle in Focus After Hours: On the corporate front, GE Vernova rallied to record highs after doubling its dividend, boosting its buyback, and raising guidance on strong energy demand. Microsoft lagged, and Oracle shares were in focus after hours amid broader questions around AI investment payoffs. Meanwhile, tech valuations remain under scrutiny, especially for firms aggressively spending on AI with mixed near-term results.

S&P 500 Sector Performance

Looking Ahead

Markets will turn their attention to the first U.S. payrolls report in months, set to be a key test of Powell’s data-dependent messaging. Any signs of labor market deterioration could further reinforce expectations for continued easing, even as the Fed holds its ground publicly. In the background, leadership transition at the Fed and ongoing global monetary tightening trends remain watchpoints into early 2026.

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