Dovish Federal Reserve Greenlights Stock Market Rally

The major U.S. stock indexes finished higher for the third straight week, with the cash S&P 500 Index and cash Dow Jones Industrial Average closing at fresh record highs. Treasury instruments also surged with the benchmark 10-year Treasury note hitting a multi-month high. The primary catalyst behind the rally was the Federal Reserve opening the door to rate cuts this year.

In the cash market last week, the benchmark S&P 500 Index settled at 2950.00, up 2.2%. For the year, it’s up 17.7%. The blue chip Dow Jones Industrial Average closed at 26719.00, up 2.4%. For the year, it’s up 14.5%. The technology-based NASDAQ Composite Index finished at 8,032.00, up 3.0%. It is up 21.0% so far this year.

Although central bank policymakers decided to leave rates unchanged in June, investors became convinced it was poised to cut rates in July and September when the Federal Open Market Committee changed the language in previous monetary policy statements.

The FOMC removed “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” And added, “but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

Also supporting the possibility of a rate cut were remarks from Federal Reserve Chair Jerome Powell in his post-meeting press conference. Powell said some officials believe the case has strengthened for interest rate cuts ahead. He further added that policymakers are concerned about some of the recent economic developments and see a growing case for easier policy.

“Overall, our policy discussion focused on the appropriate response to the uncertain environment,” he said. “Many participants believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”

But it may have been the Fed’s “dot plot” that finally convinced a rate cut was coming this year. A “dot plot” chart of individual members’ expectations for rate showed division about where rates go through the remainder of 2019.

The median “dot” indicated no change in rates this year, but the full chart showed eight members in favor of staying put, eight expecting to cut and one projecting a quarter-point increase.