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Dow gains more than 500 points on second best day of the year for stocks

A Wall St. sign next to the New York Stock Exchange (NYSE) September 16, 2008 in New York City. U.S. stocks continued to drop Tuesday morning for the second consecutive day, following yesterday's Dow Jones Industrial Average plunge of 4.4% or 504 points, being the worst single day loss since the terrorist attacks of September 2001. Today the Federal Reserve is scheduled to announce the target interest rates for the federal funds. It's not clear how the central bank will respond to recent turmoil in the world's financial markets. This comes after news of Merrill Lynch & Co. Inc selling itself to Bank of America Corp, the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection, and insurance giant American International Group Inc. (AIG) attempting to raise capital to stay afloat. (Photo by Spencer Platt/Getty Images)

US stocks recorded their second best day of the year on Tuesday, rallying as hopes for a Federal Reserve rate cut took hold and worries about an escalating trade war took a backseat.

The Dow finished the day up 512 points, or 2.1% — its best day since January 4. The Nasdaq closed 2.7% higher, erasing its losses after a steep selloff on Monday that was driven by worries about tech regulation.

The S&P 500, meanwhile, ended up 2.1%. Both the Nasdaq and the S&P recorded their best days since January 4.

Just last week, this picture looked substantially different. The trade war has put pressure on equities. Proposed tariffs on Mexican imports to the United States are set to go into effect Monday.

But investors brushed aside those fears. US markets opened higher, and those gains accelerated after Federal Reserve Chairman Jerome Powell said that the central bank was closely monitoring developments on the trade front.

“As always, we will act as appropriate to sustain the expansion,” he said Tuesday at a monetary policy conference in Chicago.

Powell’s remarks came a day after St. Louis Fed President James Bullard said the central bank may need to cut interest rates soon amid concerns about weak inflation and risks to economic growth.

Although Powell didn’t echo Bullard’s more explicit expectation for a rate cut, investors seems to have heard all they needed to hear.

According to the CME’s FedWatch tool, market expectations for an interest rate cut at the Fed’s July meeting are 65%, having moved significantly higher over the course of the day. By December, the chances are 98%.

Expectations for an interest rate cut were already growing before this week’s comments by Bullard and Powell, noted MUFG chief financial economist Chris Rupkey. They climbed even more after President Donald Trump threatened Mexico with tariffs.

There are no signs of a recession anywhere in the economic data, Rupkey added, which would be a traditional reason for the Fed to lower rates.

Trump has long called on the central bank to cut rates to stimulate the economy.

 

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