Dow Surges More than 500 Points as Fed’s Powell Lays Groundwork for Rate Cuts

The Dow and broader U.S. stock market surged on Tuesday, as investors rallied behind commentary from Federal Reserve Chairman Jerome Powell indicating an openness to lower interest rates if trade negotiations with China and Mexico don’t improve.

Dow Rallies; S&P 500, Nasdaq Follow

Wall Street’s major indexes headed for their best day since January, with the Dow Jones Industrial Average rising more than 500 points. The blue-chip index closed up 512.40 points, or 2.1%, at 25,332.18.

The broad S&P 500 Index of large-cap stocks gained 2.1% to close at 2,803.27. Ten of 11 primary sectors reported gains. The information technology sector was the biggest gainer, rallying more than 3%. Financials, materials and consumer discretionary stocks each rose by at least 2%.

After falling to its lowest level in over four months, the Nasdaq Composite Index rebounded 2.7% to close at 7,527.12.

Powell Says Rate Cuts are Possible

The U.S. central bank could be in a position to lower interest rates if trade disputes with China and Mexico aren’t resolved in a timely manner, Fed Chair Jerome Powell said on Tuesday.

In prepared remarks at a monetary policy conference in Chicago, Powell said, “We do not know how or when these issues will be resolved,” referring to trade negotiations and “other matters.”

He added:

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Powell’s comments come less than a week after President Trump expanded his trade war south of the border to Mexico by announcing 5% tariffs on all imports from the country. Talks with China have been frozen for nearly a month after Beijing reportedly backed out of a trade deal at the last second.

Analysts at Morgan Stanley believe the U.S. economy could be barrelling toward recession unless the trade disputes are resolved. Chetan Ahya, chief economist at Morgan Stanley, says U.S. markets are “underestimating the impact of trade tensions” on the economy.

Markets Pricing in a Rate Cut

As Hacked reported Monday, futures traders firly believe the Federal Reserve will begin lowering interest rates as early as this summer. Since Powell’s remarks hit the airwaves, market participants have doubled down on those expectations.

At last check, Fed Fund futures prices implied a more than 65% chance of a rate cut by July. Previously, traders were expecting the first cut to materialize sometime early next year.

Investors are cheering a rate cut because ultra-loose monetary policy increases liquidity and buoys equity markets. It remains to be seen for how long this scenario can play out before inflation becomes unbearable.

Featured image courtesy of Shutterstock. Chart via Stockcharts.com.

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi