Dow Climbs as Fed Delivers Expected Rate Cut; S&P 500 Dips
The stock market reacted in a mixed fashion Wednesday following the Federal Reserve's decision to lower its benchmark interest rate. While the Dow Jones Industrial Average surged, the S&P 500 and Nasdaq Composite experienced declines, reflecting the market's digestion of the Fed's outlook for the remainder of 2025.
Market Performance Overview
The Dow Jones Industrial Average jumped 341 points, a 0.7% increase, reaching a new all-time high. Conversely, the S&P 500 fell by 0.2%, and the Nasdaq Composite decreased by 0.6%. These contrasting movements highlight the nuanced response to the Fed's announcement.
The Fed's Decision and Rationale
The Federal Open Market Committee (FOMC) voted 11 to 1 to lower the benchmark overnight lending rate by a quarter percentage point, placing the overnight funds rate in a range between 4% and 4.25%. The central bank also indicated that two additional interest rate cuts are anticipated during the rest of the year.
The Fed's statement pointed to recent "sluggishness in the labor market," suggesting a possible shift in focus towards this aspect of its dual mandate, rather than solely prioritizing inflation. The committee noted that "job gains have slowed, and the unemployment rate has edged up but remains low," while economic activity has "moderated" and inflation "has moved up and remains somewhat elevated."
Market Outlook and Expert Analysis
A potentially more hawkish outlook for 2026, with officials predicting only one more rate cut, slower than the market's expectation of three, may have disappointed some traders. However, the Fed's "dot plot" illustrates a wide range of opinions for the upcoming year.
"Net, net, Fed officials did not hit the panic button as they chose to cut rates by the smallest possible magnitude at the September meeting," said Christopher S. Rupkey, chief economist at FWDBONDS. "The one rate cut per meeting pace shows they no longer feel tariff-based inflation is a serious threat and that the economic growth slowdown with companies onboarding fewer new employees is increasingly the bigger risk. Stagflation is out and labor market concerns are moved to the front-burner."
Sector Performance
Shares of prominent tech companies, including Palantir, Alphabet (Google's parent company), and Amazon, experienced declines. Nvidia shares fell more than 2.5% following a report in The Financial Times stating that China has banned its tech companies from purchasing Nvidia's chips.
On the other hand, big-box retailer Walmart saw gains of approximately 2%, contributing positively to the Dow, as investors expressed optimism that lower interest rates could provide relief to consumers.
Anticipating the Fed's Decision
Prior to the announcement, Wall Street anticipated a boost from a rate cut. Traders expected the S&P 500 to fluctuate by about 0.6% in either direction. This would have been the S&P 500’s largest post-Fed-Meeting move since March.
Federal funds futures trading data had indicated a 94% probability of a 25 basis point cut. A Deutsche Bank survey indicated expectations for the S&P 500 to rise 1% in the event of a 50-point cut, compared with about 0.4% on a smaller one.
Economic Projections and Potential Dissents
Alongside the rate decision, the Federal Open Market Committee’s Summary of Economic Projections (SEP) will be closely watched for insights into policymakers' expectations for inflation, unemployment, and interest rates. The latest SEP from June had projected three rate cuts by the end of next year, with two cuts expected in 2025.
Stephen Miran, recently confirmed as an interim voting FOMC member, could push for a larger rate cut. The stock and bond markets will be closely watching the language and tone of Fed Chair Jerome Powell’s comments during his press conference.
