Dow Jones surges 500 points as Fed boosts stock market rebound

The Dow exploded 558 points on Wednesday after the Federal Reserve confirmed that it still plans to cut interest rates twice this year. This sent stocks soaring, wiping out a chunk of the market’s recent losses.

The S&P 500 rose 1.7%, and the Nasdaq Composite jumped more than 2%, giving investors a much-needed rally after weeks of uncertainty.

The Fed kept its interest rate steady at 4.25% to 4.50%, which was widely expected. What mattered was that it didn’t change its forecast for two rate cuts in 2025, despite growing concerns over inflation and economic instability. “The economy is strong overall and has made significant progress toward our goals over the past two years,” Fed Chair Jerome Powell said at a news conference after the minutes. He added that inflation is still higher than the 2% target, but moving in the right direction.

“Inflation has started to move up now. We think partly in response to tariffs and there may be a delay in further progress over the course of this year,” Chair Powell said. “Overall, it’s a solid picture. The survey data both household and businesses show significant large rising uncertainty and significant concerns about downside risks.”

Traders rush back in as Powell keeps rate cuts on the table

Wall Street had been on edge leading up to the Fed’s announcement, unsure if Powell would back away from his previous stance on rate cuts. That didn’t happen. Traders saw that as a green light to pile back into stocks, sending indexes higher.

“The most important thing to recognize is that the information that came across was almost exactly what people had expected,” Michael Green, chief strategist at Simplify Asset Management, said. He pointed out that inflation patterns have been unpredictable, with summers showing weak inflation while winters and springs have seen it run hotter. This inconsistency has left the market struggling to get a clear read on the Fed’s next moves.

The market had been struggling since late February, with the S&P 500 briefly dipping into correction territory. Tuesday was another brutal session, with losses accelerating. Even after Wednesday’s rally, the Dow and S&P 500 are still trading 6% and 7% below their record highs. The Nasdaq is in worse shape, down more than 11% from its peak.

Trade war tensions collide with inflation concerns

The backdrop to all of this is the ongoing trade war that has been reignited under President Donald Trump. Earlier this month, Trump slapped tariffs on goods from Canada, Mexico, and China, leading to immediate retaliation from those countries. The situation is set to escalate further, with Trump’s temporary tariff exemptions on some Canadian and Mexican imports set to expire on April 2.

This has added pressure to an already fragile economic situation. LPL chief economist Jeffrey Roach warned that stagflation—when economic growth slows while inflation remains high—could become a serious risk. “As growth prospects falter and inflation remains sticky, we should expect investors to get more worried about stagflation,” he said. He believes core inflation will slow by summer, giving the Fed room to cut rates at its June meeting.

The inflation outlook is already complicating the Fed’s projections. Powell admitted, “Inflation has started to move up now. We think partly in response to tariffs, and there may be a delay in further progress over the course of this year.”

Tech stocks struggle while consumer staples gain traction

The Fed’s decision and Trump’s trade policies have had very different effects on different parts of the market. Nvidia and other AI chip stocks have taken a beating, with Nvidia now officially in bear market territory after plunging 24% from its 52-week high.

But not everyone is losing. Wolfe Research analyst Rob Ginsberg pointed out that consumer staples stocks are showing momentum for the first time in years. “Regardless of a bull or bear market, alpha is generated by riding those charts with the strongest relative momentum,” Ginsberg said. He highlighted that the sector is breaking out against the S&P 500 after a two-year slump.

At the same time, UBS Global Wealth Management is telling investors to stay patient with tech stocks. “While investors should brace for elevated tariff-related volatility, experience from 2018 suggests that a strong correction in tech could be followed by a significant rebound,” UBS wrote in a research note.

Despite the excitement about the rally, the Fed’s dot plot showed a divided outlook. The majority of FOMC members still expect the benchmark fed funds rate to land at 3.9% by year’s end, which lines up with the planned two rate cuts. But a growing faction within the Fed is more cautious. Four officials now believe there should be no rate cuts at all this year, compared to just one official holding that stance back in January.

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