US stocks surge then fall after Fed cuts interest rates, crude oil slides

U.S. stocks closed lower on Wednesday after the Federal Reserve cut interest rates by half a percentage point, a move that initially drew cheers from investors but later raised concerns that monetary policy makers were trying to prevent an economic slowdown.

This concern is also the reason for the decline in crude oil prices, despite statistical reports showing a decrease in US oil reserves.

At the close, the Dow Jones Industrial Average fell 103.08 points, or 0.25%, to 41,503.1. The blue-chip index had risen 375.79 points immediately after the Fed's rate decision was announced.

The S&P 500 fell 0.29% to 5,618.26 and the Nasdaq Composite fell 0.31% to 17,573.3. Both gauges briefly set intraday records before giving up those gains and closing in the red.

In a move that was widely expected by the market, the Fed cut interest rates by 0.5 percentage points, to around 4.75-5% from the previous 5.25-5.5%. This is the Fed's first interest rate cut in the past 4 years, in the context of US inflation having significantly slowed down after reaching a 4-decade peak more than 2 years ago.

“The Committee has increased confidence that inflation is moving sustainably toward its 2 percent objective, and it judges that risks to achieving its maximum employment and inflation goals are roughly balanced,” the Fed said in a statement after its meeting.

Before the Fed meeting, the futures market had placed a larger bet on the Fed opting for a 0.5 percentage point rate cut rather than the traditional 0.25 percentage point cut. In the end, the market got the rate cut it wanted, but Wall Street stocks failed to hold on to their gains.

“The decision to cut rates by a half percentage point suggests that the Fed is comfortable with the trend of falling inflation, that it is sustainable. The focus of the Fed may now be shifting to avoid putting pressure on economic growth, which happens when the Fed keeps rates too high for too long,” Philip Straehl, chief investment officer of Morningstar Wealth, told CNBC.

At a press conference following the Fed's meeting, Fed Chairman Jerome Powell tried to calm concerns that the Fed was cutting rates so aggressively because it saw problems in the economy. He signaled that the Fed chose to cut rates this way because inflation had fallen significantly.

“I don't see anything in the economy right now that suggests a growing likelihood of a recession,” Mr. Powell stressed.

Still, U.S. stock indexes turned red toward the end of the trading session. Part of the reason for this decline may have come from the fact that the market had rallied significantly before the Fed officially cut interest rates. The S&P 500 has increased nearly 18% this year and increased more than 1% in the past month.

In the energy market, Brent crude oil futures in London decreased by 0.05 USD/barrel, closing at 73.65 USD/barrel. WTI crude oil futures in New York decreased by 0.28 USD/barrel, closing at 70.91 USD/barrel.

The Fed's move to cut interest rates by 0.5 percentage points has oil traders worried that the Fed is reacting to the risk of an economic recession - a scenario in which the growth rate of energy consumption will slow.

A weekly report from the US Energy Information Administration (EIA) showed that the country's crude oil inventories fell by 1.6 million barrels in the week ending September 13, to 417.5 million barrels, the lowest level in the past year.

Data on falling oil inventories has supported oil prices, but not much, because according to Mr. Bob Yawger, director of energy futures at Mizuho bank, the market thinks that the decline is simply due to the impact of Hurricane Francine.

Gasoline and distillate inventories increased slightly during the reporting period.

After falling below $70 a barrel, the lowest since December 2021, Brent crude oil prices recovered significantly on September 10. The $75 a barrel level is a strong resistance level for Brent crude oil prices amid low global refining margins - a sign of weakening demand.

“The peak summer demand period for gasoline has passed, and the negative shift in investor sentiment is the reason for the decline in oil prices. However, the risk of escalating conflict in the Middle East still poses a risk of supply disruption,” Mazen Salhab, chief strategist at BDSwiss, told Reuters.