Stocks rallied sharply on Wednesday despite Federal Reserve Chair Jerome Powell striking a neutral tone after the central bank's third consecutive rate cut, dashing expectations for further easing in January.
The Russell 2000 — as tracked by the iShares Russell 2000 ETF (NYSE:IWM) — surged 1.7% to fresh all-time highs, while the Dow Jones Industrial Average jumped 558 points, or 1.2%, to 48,120.
The S&P 500 rose 0.8% and the Nasdaq 100 added 0.6%, both moving closer to their own record levels.
Despite Powell effectively ruling out a rate cut in the first meeting of 2026, investors latched onto the Fed's upgraded economic outlook.
Compared to September, the December projections show stronger growth, softer inflation, and an unchanged path for interest rates ahead.
‘We're In The Range Of Neutral’
The Federal Open Market Committee cut the federal funds rate by 25 basis points to 3.50–3.75%, citing cooling labor conditions and moderating inflation.
Powell said the current rate is "within a broad range of estimates of neutral" and emphasized that the Fed is now "well positioned to wait and see how the economy evolves."
Powell left little doubt that January would likely be a hold.
Commenting the Fed’s interest rate decision, President Donald Trump said the Fed should have made a cut at least twice the size of the one delivered.
Policy Division Reflects Dual Mandate Tension
While the vote to cut was backed by 9 of 12 officials, the meeting exposed deep divisions.
Powell acknowledged that the FOMC is grappling with "tension between our employment and inflation goals." While inflation remains above target, rising jobless claims and weak hiring have increased downside risks to employment.
Pressed on whether the Fed's next move could be a hike, Powell dismissed the notion: "I don't see that as anybody's base case." Most policymakers, he said, are split between holding rates steady or cutting further later in 2026.
Asked about his legacy as he nears the end of his term as Fed Chair in May, Powell said his main goal is to hand off an economy in "really good shape," with inflation at 2% and a strong labor market. "All of my efforts are to get to that place," he said.
Regional Banks, Homebuilders And Clean Energy Stocks Rally
Despite Powell's message, equity markets powered higher as traders focused on the Fed's rosier economic forecasts. Real GDP is now expected to grow 2.3% in 2026, up from 1.8% in the prior outlook.
Core inflation is projected to fall to 2.5% next year, reaching the 2% target by 2028.
Powell noted that stronger business investment, particularly in artificial intelligence and data centers, along with resilient consumer spending, is supporting the improved growth outlook.
"The baseline expectation for next year is a pickup in growth," he said, crediting both fiscal support and AI infrastructure.
Rate-sensitive sectors rallied sharply:
- The SPDR S&P Regional Banking ETF (NYSE:KRE) surged 3.7% (its strongest session since August).
- Triumph Financial Inc. (NASDAQ:TFIN) rose 6.2%.
- Kearny Financial Corp. (NASDAQ:KRNY) gained 6%.
- Clean energy names also saw heavy buying, with the Invesco Solar ETF (NYSE:TAN) up 3.5%.
- Homebuilders rallied as well, pushing the iShares Home Construction ETF (NYSE:ITB) up 3.2%
- Dream Finders Homes Inc. (NYSE:DFH), up 8.5%.
- Installed Building Products Inc. (NYSE:IBP), up 7.1%.
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