Markets Brace for Fed's Big Decision: Will Interest Rates Drop?

Wall Street indexes stayed flat as investors awaited the Federal Reserve's anticipated interest rate cut after more than four years. The decision, expected to occur at 2:00 p.m. ET, has traders split on whether it will be a 25 or 50 basis points reduction. Key sectors showed mixed performance ahead of the announcement.

Wall Street's main indexes remained stable on Wednesday as investors held their breath ahead of the Federal Reserve's highly anticipated decision regarding the first interest rate cut in more than four years. Market consensus leans towards a 50-basis-point reduction.

Since July 2023, borrowing costs have remained at their highest levels in over two decades, following the central bank's last interest rate increase by 25 basis points to a range of 5.25% to 5.50% as a measure against inflation. Currently, focus has shifted more towards a moderating labor market. At 9:45 a.m., the Dow Jones Industrial Average dropped by 40.18 points (0.11%) to 41,560.69, the S&P 500 increased by 3.11 points (0.06%) to 5,637.69, while the Nasdaq Composite went up by 22.76 points (0.13%) to 17,650.82.

Nine of the eleven S&P 500 sectors traded flat ahead of the Fed's announcement, expected at 2:00 p.m. ET, although energy and industrials each saw a slight increase of 0.3%. Meanwhile, the Russell 2000 index, which monitors small-cap stocks that typically perform better in a low interest-rate environment, increased by 0.19%.

After a tumultuous early August, the S&P 500 and the Dow have recovered and are now close to their record highs, heightening nerves as investors await the Fed's least predictable decision in years. Following recent dovish comments from both current and former Fed officials, traders are now pricing in a 61% chance of a 50-basis-point cut, according to the CME Group's FedWatch tool. However, analysts warn that such a significant move could alarm the markets.

The likelihood of a smaller 25-basis-point cut has decreased to 39% from 86% over the past week. Investors are also keen to hear Fed Chair Jerome Powell's comments at 2:30 p.m. ET for insights into the central bank's economic outlook and the possibilities of more rate cuts. "This is the first Fed meeting in a while without a clear consensus on the rate change," said Mike Dickson, head of research at Horizon Investments.

Regardless of the Fed's decision, there will be a mix of reactions from the market. Stock options indicate a potential 1.1% swing for the S&P 500 post-announcement, based on ORATS options analytics service. All three major market indexes have rallied this year thanks to the anticipated drop in interest rates amidst moderating inflation and a cooling job market. Major growth stocks followed varied trends: Apple gained 1%, Alphabet 0.41%, while Microsoft fell by 0.57%.

In individual stock news, Intuitive Machines saw a 52% jump following a $4.8 billion contract with NASA, while U.S. Steel rose by 1.7% after a national security panel allowed Nippon Steel to refile their application for a takeover approval. On the NYSE, advancing issues outnumbered decliners by a ratio of 1.75-to-1, and by 1.26-to-1 on the Nasdaq. The S&P 500 recorded 16 new 52-week highs and no new lows, while the Nasdaq Composite noted 23 new highs and 21 new lows.

(With inputs from agencies.)