Explained — Here's why US markets rallied despite fewer than expected cuts projected for 2026

Benchmark indices on Wall Street rallied sharply on Wednesday after the US Federal Reserve cut interest rates for the third consecutive time, in-line with street expectations.

The Dow Jones ended with gains of close to 500 points, while the S&P 500 ended near its record closing high, registering its best Fed policy day since March. The Nasdaq though, underperformed, ending with gains of only 0.3%.

Markets rallied despite the Fed projecting only one rate cut in 2026 and another one in 2027, contrary to money market expectations, that were going with two or more cuts for next year.

Fed Chair Jerome Powell stated that the committee is now well placed to see how the economy evolves and take future actions after assessing incoming data.

While Powell may have projected fewer cuts, the markets were pleased as he effectively ruled out a rate hike. "I don't think a rate hike is anybody's base case at this point," the Fed Chair told reporters in his post-policy press conference.

The markets are also taking cognisance of the fact that while Powell and the Fed Dot Plot, an individual projection of Fed officials on the future interest rate path, may have projected only one cut for next year, there will be a new individual at the helm of affairs at the FOMC once Powell's term ends in 2026.

A CNBC Fed Survey before the policy had shown 76% of the respondents stating that the new Fed Chair will be more dovish compared to Powell. Both US President Donald Trump and Kevin Hassett, the current White House National Economic Council Director and front-runner for being Powell's successor at the FOMC, have explicitly expressed the need for lower interest rates.

After the policy announcement, Trump mentioned that the rate cut could "at least" be doubled from what was announced, and that he is looking for someone who is "honest" about interest rates as the next Fed chair.

Despite Powell's remarks, Money Market futures are still pricing in 77% odds of two or more cuts in 2026.

Another factor that enthused the markets is the Fed announcement of purchasing short-term securities worth $40 billion starting Friday, which is higher than, and earlier than what most experts on the street were anticipating. Experts were hoping for the purchase to be between $15 billion and $20 billion and for it to begin in January.

"We could be seeing a triple whammy for markets, with growth, productivity, and more easing giving stocks a boost,” said Michael Bailey, director of research at Fulton Breakefield Broenniman. “It sounds like Powell sees favorable productivity excluding AI, suggesting that AI could be the icing on the cake if we begin to see evidence that AI tools make working more productive."

The US Dollar index fell below the mark of 99 after the Fed policy, while precious metals like Gold advanced, as lower interest rates are positive for non-interest yielding instruments like the yellow metal.