Wall Street Rises on Hopes for Rate Cuts, as Dow Ticks Toward Another Record

NEW YORK (AP) — Wall Street is ticking higher Thursday following its big rally the day before on excitement that several cuts to interest rates may indeed be coming next year.

The S&P 500 was 0.3% higher in morning trading and within 1.5% of its all-time high set early last year. The Dow Jones Industrial Average was up 75 points, or 0.2%, and on track to set a record for a second straight day, as of 10:30 a.m. Eastern time. The Nasdaq composite was 0.3% higher.

Moderna jumped 13% after it reported encouraging data from a study of its treatment for high-risk melanoma that’s used with Merck’s Keytruda. That helped to offset a 6.3% slump for Adobe, which gave a forecast for 2024 revenue that fell short of analysts’ expectations.

Stocks broadly have been shooting higher since October on hopes that inflation has cooled enough for the Federal Reserve to not only stop its market-rattling hikes to interest rates but to even begin considering cutting them. Those hopes strengthened Wednesday after the Fed held its main interest rate steady and said the federal funds rate is likely already at or near its peak.

More importantly, the Fed also released projections showing its median official expects the federal funds rate to fall next year by more than earlier expected. Wall Street loves lower interest rates because they can goose prices for investments and relax the pressure on the economy and financial system.

Other central banks are also meeting this week, and hopes are rising that the pivot toward easier conditions for financial markets and the economy may be global. Both the European Central Bank and Bank of England on Thursday decided to keep their main interest rates unchanged, though each also gave signals that cuts are not imminent.

Treasury yields sank further in the bond market as traders bet on a series of cuts to U.S. interest rates coming in 2024.

The yield on the 10-year Treasury fell to 3.95% from 4.03% late Wednesday. It was above 5% in October, at its highest level since 2007, and the sharp drop since then has given the stock market a big boost.

Owners of office parks, hotels and other real estate, which benefit from lower interest rates, were some of Thursday’s bigger winners. Real-estate stocks rose 2.4% for the biggest gain among the 11 sectors that make up the S&P 500 index, including a 6.8% jump for Boston Properties.

Banks were also strong. High interest rates have hurt the industry’s players a rung or two in size below the behemoth banks, and they helped cause three high-profile collapses earlier this year. Lower interest rates could ease the pressure, and Regions Financial and Zions Bancorp. both jumped at least 7%.

But the recent rally for stocks and drop for Treasury yields seem to be banking on the Federal Reserve pulling off what was considered a long shot not long ago.

The hope is that the Fed can manage its interest-rate policy exactly right: first, by slowing the economy and hurting investment prices enough through high interest rates to snuff out inflation, and then by making conditions easier at the right time to prevent the economy from slowing too much and sliding into a painful recession.

That’s still not assured, as both Fed officials and cautious investors are warning.

One threat is that the economy stays too hot, which would keep upward pressure on inflation and could force the Fed to at least keep rates high for longer or hike them again.

A couple reports on Thursday indicated the economy may be stronger still than economists expect. One showed U.S. shoppers spent more at retailers in November than October, when economists were forecasting a slight decline. Another report said fewer U.S. workers applied for jobless benefits last week, a signal of a remarkably resilient job market.

Treasury yields briefly undid some of their declines following the reports. But traders are still betting on a nearly three-in-four chance that the Federal Reserve will cut its main interest rate by at least 1.50 percentage points next year, according to data from CME Group. That’s double what the median Fed official is expecting.

“Our view is that the market is pricing too fast a pace of cuts,” said Solita Marcelli, chief investment officer America at UBS Global Wealth Management.

Critics have said the amount of rate cuts that traders are expecting is unlikely unless the U.S. economy falls in to a recession.

Momentum nevertheless appears to be building further.

With inflation falling faster than expected, economists at Goldman Sachs say they now forecast the Fed to cut its main interest rate by 0.25 percentage points at each of its meetings in March, May and June next year, followed by cuts every three months that take the federal funds rate down to a range of 3.25% to 3.50%. That forecasted bottom is a bit lower than they had earlier estimated.

In stock markets abroad, indexes rallied across Europe and were mixed in Asia. Japan’s Nikkei 225 slumped 0.7% as hopes for U.S. rate cuts drove the value of the dollar down against the yen. That hurts Japanese exporters.

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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.