US markets take a pause after a record rally ahead of Fed rate decision

Benchmark indices on Wall Street paused on Tuesday, September 16, after a strong rally that propelled all three indices to a record high.

The Dow Jones traded in a 300-point range and ended with losses of 120 points, while the S&P 500, traded in a 25-point range. The broader market index, along with the Nasdaq also ended marginally below the flat line.

Market participants refrained from taking outsized bets a day before the US Federal Reserve announces its policy decision, which is most likely to show its first rate cut of 2025. However, the street is more focused on the commentary from Chair Jerome Powell and the Dot Plot, which will reveal the future trajectory of monetary policy.

Retail sales reported for the month of August surpassed every economist estimate, coming in at 0.6% month-on-month, contrary to expectations of 0.2% growth. Excluding auto sales, the metric grew 0.7%, also higher than the 0.4% projection. Economists though believe that since the retail sales are not adjusted for inflation, the figure could also be a function of higher prices and not necessarily higher volumes. Yet, this has added to the Fed's dilemma.

The world's largest central bank is cutting interest rates at a time when:

• Markets are at an all-time high


• Other asset classes like Gold and Crypto are also at record highs


• GDP growth is strong


• Inflation is well above their target


• Labor market is weak, but the weakness has not percolated into consumer spending yet

A survey carried out by 22V Research shows 43% of the respondents expecting a risk-on reaction to the Fed policy, while only 26% expect a risk-off or a "sell-the-news" kind of reaction.

Here's what the CME FedWatch Tool is projecting ahead of the Fed policy decision tonight:

• 96.1% probability of 25 bps cut tonight


• 76.8% probability of status quo in October


• 71% probability of another 25 bps cut in December

Lon Erickson at Thornburg Investment Management says he doesn’t think the market is ready for another 50 basis-point cut this year like the Fed did when the cutting process first began.

“Considering what we’ve seen with inflation, which came in a bit higher than expected, they’ll continue to be cautious,” he said. “The wild card remains inflation. The key question is how that plays out over the rest of the year and whether we end up in the dreaded stagflation-type environment, which would put the Fed in a tough spot.”