Dow Jones Industrial Average Surges to Record High

The Dow Jones Industrial Average reached an all-time high, closing at over 37,000 points for the first time. This surge came after the Federal Reserve announced its plans to potentially cut its benchmark interest rate next year.

The blue-chip index experienced a significant jump of 512 points, or 1.4%, ultimately ending the day at 37,090 points. This surpasses its previous peak of 36,799 points in early 2023. The broader S&P 500 also experienced a 1.4% increase and is now within 1.9% of its own record. The tech-heavy Nasdaq composite added 1.4% as well.

In addition to the interest rate news, the Federal Reserve decided to keep their short-term rate unchanged for the third consecutive meeting. This decision was made based on indications that their efforts to control inflation have been effective. Fed Chair Jerome Powell stated in a news conference that the federal funds rate is projected to decrease to 4.6% by the end of next year, down from its current range of 5.25% to 5.5%.

Interest Rate Cuts Boost Spending and Economic Growth

Lower interest rates curb borrowing costs for consumers and businesses, boosting spending and broader economic growth. Interest rate cuts also tend to buoy riskier assets, including stocks. Markets have steadily pushed higher since October as investors bet that the Federal Reserve, which hiked rates 11 times during the latest tightening cycle to their highest level in 22 years, will pivot to cuts in 2024.

While noting that the Fed is not ready to declare victory over inflation, Fed Chair Jerome Powell also said Fed officials don't want to wait too long before cutting the federal funds rate.

"We're aware of the risk that we would hang on too long" before cutting rates, he said. "We know that's a risk, and we're very focused on not making that mistake."

Headline inflation around the U.S. edged down in November as gas prices fell. The Consumer Price Index edged 0.1% higher last month, leaving it 3.1% higher than a year ago, according to the Labor Department's report on Tuesday. The so-called core CPI, which excludes volatile food and energy costs, climbed 0.3% after a 0.2% increase in October and is up 4% from a year ago. The Fed targets annual inflation of 2%.

Following the release of the Fed's rate projections, traders on Wall Street increased their bets for rate cuts in 2024. Most of those bets now expect the federal funds rate to end next year at a range of 3.75% to 4%, according to data from CME Group.

According to David Lefkowitz, the Chief Investment Officer of Equities at UBS, there is a potential for modest gains in U.S. stocks at their current levels. In a research note to investors, Lefkowitz stated that both sentiment and positioning have improved, but there are still risks of downside if there are any negative economic or earnings surprises.