- The S&P 500 surged to a record high on Thursday after the Fed hinted it could cut interest rates as soon as next month.
- Analysts were surprised by the Fed’s stance given the US economy isn’t in recession, and feared the bank could appear to have succumbed to markets trends and Trump demands.
- The Fed is “at a very serious risk of losing its credibility,” says one analyst.
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The S&P 500 surged to a record high on Thursday after the US Federal Reserve hinted it could cut interest rates as soon as next month to spur growth, even though the economy is expected to grow by 2.1% this year.
The large-company index jumped 0.9% to 2,953 — comfortably above its record close of 2,946 in April. Allergan stock leapt 6% on the prospect of the pharmaceuticals giant splitting up its business, while Adobe shares climbed 5% after the software group delivered an earnings beat. Discovery Communications, Ulta Beauty, and Nordstrom were also among the biggest risers with gains of about 3%.
“We can’t believe we are talking about a rate cut as soon as July, as the economy is NOT in a recession,” Steven DeSanctis, an equity strategist at Jefferies, said in a note to clients (the all caps was his). “Of the last five rate cuts, only ’95 was not associated with a recession.”
Yet Fed Chairman Jerome Powell pointed to economic “uncertainties” such as the US-China trade war that could worsen the global economic outlook. “The case for somewhat more accommodative policy has strengthened,” Powell said after the central bank cut its inflation forecast from 1.8% to 1.5%.
Market watchers were also concerned about the optics for the central bank, given recent clamoring from President Donald Trump and investors for rate cuts.
The “Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility,” said Neil Wilson, chief market analyst for Markets.com.
Here’s the market roundup as of 9:39 a.m. ET:
- The S&P 500 and Dow Jones Industrial Average rose 0.9%, while the Nasdaq climbed 1.1%.
- European equities climbed with Germany’s DAX and the Euro Stoxx 50 up 0.8%, and Britain’s FTSE 100 up 0.6%.
- Asian markets soared with the Shanghai Composite up 2.4%, the SZSE Component up 2.3%, and Hong Kong’s Hang Seng up 1.2%.
- Oil surged on fears of supply disruption after Iran shot down a US drone and said it was “ready for war.” West Texas Intermediate crude jumped 4.2% to $56.20, and Brent crude rose 3.2% to $63.80.
- Gold climbed 2.8% to $1,387 as the prospect of lower interest rates spurred investors to shift their cash from US dollars to the yellow metal. “This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out,” Wilson said.
- The 10-year US Treasury yield dropped by about 1.4% to 1.999%, its first fall below 2% since late 2016.