New York, Sept 14 — U.S. stocks rallied and gold prices soared to new record highs on Friday, fueled by heightened speculation that the Federal Reserve may implement more aggressive rate cuts at its upcoming policy meeting.
Futures contracts tied to the Fed’s policy rate now imply a 47% probability of a half-percentage-point cut, a significant rise from the 28% chance reported earlier in the week. This shift follows media reports suggesting that the Fed’s decision could be a close call between a 50 basis point and a 25 basis point reduction.
The prospect of more substantial rate cuts buoyed not only equities and gold but also drove down Treasury yields and the U.S. dollar. All three major U.S. stock indexes closed higher: the Dow Jones Industrial Average (^DJI) rose 0.72%, the S&P 500 (^GSPC) increased 0.54%, and the Nasdaq Composite (^IXIC) gained 0.65%. The global MSCI index (^MIWD00000PUS) also saw an uptick of 0.61%.
The anticipation for a more significant Fed rate cut was reinforced when former New York Fed President Bill Dudley commented at a forum in Singapore, asserting that “there’s a strong case for 50.
However, despite the optimistic outlook for a large cut, recent inflation and economic data suggest the Fed may opt for a more cautious approach, given that it has not reduced rates since 2020. Douglas Porter, chief economist at BMO Capital Markets, noted that while many rate-cutting cycles begin with substantial reductions, these often occur amid financial market stress. With the S&P 500 just 1% off its peak and U.S. household net worth at an all-time high, current financial stress appears limited.
In Asia, stock markets closed lower, with the Shanghai Composite (^SSEC) falling 0.48% and the Nikkei (^N225) dropping 0.68%, though both indexes were still positive for the week.
The dollar weakened further as investors adjusted their expectations for Fed policy. The dollar fell as much as 1.0% against the yen, reaching its lowest level since December 28, before stabilizing at 140.83 yen, down 0.68%. The dollar index, which measures the currency against a basket of major rivals, fell to a one-week low of 101.00 before recovering slightly to 101.11, down 0.05%.
Benchmark 10-year Treasury yields decreased by 2.1 basis points to 3.65886%, while yields on two-year bonds, sensitive to interest rate expectations, dropped 5.9 basis points to 3.5803%.
Gold prices continued their upward trend, heading for their strongest weekly gain since mid-August. The precious metal rose 0.9% to $2,581.70 an ounce, buoyed by a weaker dollar and the anticipation of rate cuts.
Crude oil prices also recovered in late trading as U.S. production resumed following Hurricane Francine. U.S. crude oil prices increased by 0.29% to $69.17 per barrel, while Brent crude rose 0.13% to $72.06 per barrel.