Federal Reserve Cuts Interest Rates Again, Wall Street Celebrates, S&P 500 Races Toward the 7,000-Point Milestone

The stock market surged, with the three major U.S. stock indices rising collectively. After the Federal Reserve announced its rate cut decision on Wednesday, the market responded quickly—the Dow Jones Industrial Average soared 497.46 points (1.1%), closing at 48,057.75; the S&P 500 increased by 0.7% to 6,886.68 points, hitting a new all-time high intraday; the Nasdaq Composite rose 0.3% to 23,654.16 points.

Behind this rally is a strong easing signal from the Federal Reserve.

Third consecutive rate cut, internal policy committee divisions intensify

The Federal Open Market Committee (FOMC) once again took action, lowering the federal funds rate target range to 3.5%–3.75%, a single cut of 25 basis points. This is the third rate cut this year. While the decision appears stable, it conceals significant internal disagreements.

The vote was 9 to 3, but opposition came from both ends of the policy spectrum: Chicago Fed President Goolsbee and Kansas City Fed President Schembri favored holding rates steady, while Fed Governor Mester advocated for a 50 basis point cut in one go. This rare “two-sided opposition” reflects deep divisions within the committee regarding economic risk assessments.

Policy statement hints at three major signals

The statement from the Fed included three market-friendly adjustments:

First, reinitiating short-term government bond purchases, aimed at lowering short-term yields and injecting liquidity into the market.

Second, removing the phrase “unemployment rate remains low”, instead emphasizing signs of weakening in the labor market, implying emerging employment pressures.

Third, reintroducing the key phrase “assessing further adjustments based on the latest data”. The last time this appeared was December 2024, seen as a prelude to a pause in rate cuts. Its reactivation now is widely interpreted as the Fed preparing for an “observation period”—future rate cuts may become more cautious and irregular.

Powell further reinforced this signal at the post-meeting press conference, explicitly stating “no one expects the Fed to raise rates”, and positioning current rates within a “broadly neutral range,” leaving room for policy stagnation in the coming months.

Dot plot reveals true expectations: rate hikes may really be on hold

The latest Fed dot plot shows a more cautious stance—seven officials in 2026 believe no rate cuts are necessary, with the median forecast indicating only one rate cut in 2026.

Specifically, the 2026 projections are as follows:

• 3 officials support one rate hike (up from 2 in September)
• 4 favor holding rates steady (down from 6 in September)
• 4 expect one rate cut (up from 2 in September)
• 4 expect two rate cuts
• 2 expect three rate cuts (down from 3 in September)
• 1 expects four rate cuts
• 1 expects six rate cuts (none in September)

These subtle changes reflect a tightening of the committee’s stance on policy in 2026.

Market bets on more aggressive rate cuts than expected by the Fed

Ironically, Wall Street’s optimism about the Fed exceeds the Fed’s own outlook. CME FedWatch tool shows that 93.7% of market participants are betting on at least two rate cuts in 2025, far above the Fed dot plot’s forecast.

The market logic is simple: expectations of stronger economic growth, declining inflation pressures, and rising employment risks combine to support deeper and more frequent rate cuts by the Fed next year.

Especially considering potential inflation volatility from overseas tariffs and trade policies, the market believes the Fed will face a more complex balancing act—preventing price rises caused by tariffs while managing potential economic slowdown.

Analysts bullish: Christmas rally underway, S&P 500 targets 7,000 points

Senior economist José Torres at Interactive Brokers believes that although the dot plot suggests limited room for rate cuts in the future, the Fed restarting balance sheet expansion could ignite market risk appetite. He forecasts:

“This decision paves the way for a Christmas rally, and the S&P 500 could break through 7,000 points in the coming weeks.”

The logic supporting this view includes: stronger economic growth expectations, more moderate inflation outlook, and stable employment data—all driving stocks and bonds higher in tandem.

Conclusion: Rate cuts continue but at a slower pace

The core message of this Fed meeting can be summarized as “rate cuts continue, but cautiously.” With government shutdown delays causing official economic data to be postponed, the Fed will rely more on employment reports and inflation data in the coming months to fine-tune policy.

The divergence between market expectations and the Fed’s outlook will likely be a key driver of asset price volatility in the next phase. Whether Wall Street’s optimism can be realized or the Fed ultimately acts more cautiously remains to be seen, with answers gradually unfolding in 2025 economic data.