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Dow Aggressively Rallies as Fed Sharpens Its Rate-Cutting Knife

Last Updated September 23, 2020 12:50 PM
Josiah Wilmoth
Last Updated September 23, 2020 12:50 PM

The Dow prepared to mount an aggressive recovery on Friday after multiple Fed officials appeared to signal the need for an even larger interest rate cut than Wall Street already expects.

The index sped toward a substantial gain in the week’s closing session, even after the Fed clarified that at least one set of those remarks did not hint at a bold rate-slashing regime.

Dow Surges by 100 Points

All of Wall Street’s major indices advanced during the morning session. The Dow Jones Industrial Average surged by triple digits at the open. As of 9:34 am ET, the Dow had gained 98.74 points or 0.36% to climb to 27,321.71.

dow jones industrial average
The Dow bounced following a choppy futures session. | Source: Yahoo Finance

The Nasdaq jumped 34.43 points or 0.42% to 8,241.67, while the S&P 500 lagged its peers to rise 8.53 points or 0.28% to 3,003.64.

Fed Leaves Wall Street Awash in Dovish Commentary

The stock market traded higher following a bullish, if choppy, futures session.

Dow futures had surged overnight following a speech from New York Fed President John Williams  that caused investors to speculate that the central bank could slash its interest rate target by 50 basis points at the upcoming FOMC meeting, rather than the consensus 25 basis point cut.

Speaking before the Central Bank Research Association, Williams said that central banks must “act quickly” during times of “economic distress.”

“It’s better to take preventative measures than to wait for disaster to unfold,” he said, than to “keep your powder dry.”

Almost concurrently, Fed Vice Chairman Richard Clarida appeared on the Fox Business Network , where he appeared to signal a rate cut in equally-dovish terms.

“You don’t need to wait until things get so bad to have a dramatic series of rate cuts,” he said. “We need to make a decision based on where we think the economy may be heading and, importantly, where the risks to the economy are lined up.”

Wall Street has priced in a 25 basis point interest rate reduction since the beginning of June, according to CME’s FedWatch tool. However, the odds of a 50 basis point cut have steadily increased ahead of the July FOMC policy meeting.

CME FedWatch index rises along with Dow
This chart illustrates how quickly the Fed rate policy has shifted. | Source: CME

Those odds spiked as high as 69% as bulls munched on the dovish commentary from Williams and Clarida, and Dow futures coiled the index for a massive gain at the open.

Stock Market Rally Presses on Despite Fed Clarification

However, the pre-bell rally suffered a setback when a New York Federal Reserve spokesperson threw cold water on the market’s interpretation of John Williams’ remarks, stating that it was an “academic speech” based on historical research – not a preview of his stance at the FOMC meeting.

Even so, Clarida’s dovish interview could not be so easily dismissed, and it wasn’t long before the Dow, S&P 500, and Nasdaq were once again on track to end the week with a substantial advance.

Right now, traders expect there is a 41.1% chance the Fed will reduce its target rate to 175-200 from its present level at 225-250.

stock market prices in 50 basis point interest rate cut.
There’s now more than a 40% chance that the Fed will slash its target rate by 50 basis points. | Source: CME

Such an aggressive policy stance was unthinkable as recently as two months ago, but the sudden collapse in US-China trade negotiations, coupled with mixed economic data, appears to have left Fed hawks unable to hold the line.

In just a few more days, President Trump will get his rate cut.

Click here for a real-time Dow Jones Industrial Average (DJIA) price chart.