Dow and S&P 500 hit new highs after Fed begins easing cycle

Traders bet on optimism of soft landing after US central bank delivers large interest rate cut

A screen on the trading floor at the New York Stock Exchange shows Federal Reserve chairman Jerome Powell. Reuters

Wall Street reached new heights on Thursday, with the Dow Jones and S&P 500 posting record highs as traders bet the Federal Reserve can achieve a "soft-landing".

S&P 500 closed above 5,700 for the first time after jumping 1.7 per cent on the day to 5,713.14. The Dow Jones Industrial Average crossed 42,000 for the first time after rising 525.18 points, or 1.27 per cent, to close at 42,028.28. The Nasdaq Composite soared 2.51 per cent.

Tech stocks also rallied, with Nvidia jumping 3.97 per cent. Meta and Apple were up 3.93 and 3.71 per cent, respectively.

Wall Street's rally followed optimism across Europe and Asia after the Fed delivered its first interest rate cut in four years on Wednesday.

The Fed's aggressive 50-basis point cut, which lowered its benchmark rate to 4.75 per cent to 5.00 per cent, marked a significant turning point for the central bank after holding rates steady for more than a year.

While major US indexes ended Wednesday relatively unchanged after the announcement, Art Hogan, chief market strategist at B Riley Wealth, said Thursday's movement was a better reflection of market reaction.

“Today, you have much better chance of capturing the entire day and that seems to be what markets are doing here,” Mr Hogan said.

New economic data added further optimism towards soft-landing hopes, where inflation and interest rates come down without a sharp increase in unemployment.

Before Thursday's opening bell, a Commerce Department report showed jobless claims last week at 219,000, lower than the 230,000 estimate, supporting the idea that the US economy is not headed towards a recession.

Entering this week's two-day meeting, Fed officials were thought to be considering a more traditional 25-basis-point cut or the more aggressive 50 bps cut.

Fed chairman Jerome Powell framed the larger cut in a more optimistic perspective, saying acting now showed the Fed was committed to not falling behind the curve on cutting rates.

“We made a good, strong start to this, and that's really, frankly, a sign of our confidence – confidence in inflation is coming down towards 2 per cent on a sustainable basis,” Mr Powell said, referring to the Fed's long-term target.

He also indicated that with inflation now easing, Fed officials can turn to protecting the US labour market and economic growth.

That turn was a long time coming for markets who had priced in a two-thirds probability that the Fed would begin with the aggressive 50 bps cut.

"We expected this at the beginning of this year, but the inflation indicators hadn’t come down as much as the Fed would have liked,” Cetin Duransoy, chief executive of online banking marketplace Raisin, told The National.

Mr Powell cautioned markets that the initial rate cut should not be seen as the new normal, saying the move allows the Fed to “recalibrate” interest rates towards a more neutral level.

“I do not think that anyone should look at this and say, 'Oh, this is the new pace',” he said.

Markets are pricing in more cuts totalling 75 bps for the rest of the year, according to the CME FedWatch tool. Projections released by the Fed on Thursday showed the median forecast was it will cut rates by an additional 50 bps this year, followed by a full percentage point in 2025.

The Fed holds two more meetings this year, in November and December.