Fed Holds Rates Steady, Hints at September Cut; U.S. Stocks Rally Across the Board

On July 28, early morning Beijing time, the Federal Open Market Committee (FOMC) released its latest rate decision, keeping the federal funds rate target range unchanged at 4.25%-4.50%, as expected. However, the subsequent policy statement and Fed Chair Jerome Powell's press conference sent clear dovish signals, hinting at a possible rate cut as early as September. Boosted by this, all three major U.S. stock indexes rallied, with the Nasdaq Composite up 1.6%, the S&P 500 up 1.2%, and the Dow Jones Industrial Average up 0.8%.

Decision Highlights: Steady but Clear Pivot Signal

The rate decision was unanimous, indicating consensus within the Fed to hold rates steady. Compared to the June statement, the July statement made slight adjustments to the inflation description, changing "inflation remains elevated" to "inflation has eased but remains above the 2% target," and added "job growth has slowed." The market widely views this as paving the way for a rate cut.

Fed Chair Powell stated at the press conference that inflation has fallen significantly from its peak and the labor market is moving into balance. If data continue to meet expectations, a rate cut could be discussed as early as the September meeting. He also emphasized that the Fed would not wait until inflation fully returns to 2% to act, but would "adjust policy preemptively." This wording was interpreted by the market as a strong signal of a rate cut.

Market Reaction: Tech Stocks Lead, Bond Yields Fall

After the rate decision, the three major U.S. indexes surged, closing at recent highs. By sector, technology and AI were the strongest, with Nvidia up 3.2%, Apple up 1.9%, Microsoft up 2.1%, and Meta up 2.8%, reflecting the boost from rate cut expectations for high-valuation growth stocks. Financials also performed well, with large bank stocks like JPMorgan Chase and Goldman Sachs rising over 1%.

In bond markets, the U.S. 10-year Treasury yield fell 8 basis points to 4.02%, returning near the 4% level; the 2-year yield dropped 12 bps to 4.48%, narrowing the yield curve inversion. Interest rate swaps showed the probability of a 25-bp rate cut in September rose from 68% before the decision to 92%, and expectations for total rate cuts this year increased from 50 bps to 75 bps.

Background Analysis: Rate Cut Path vs. Inflation Battle

The Fed had been cautious about cutting rates this year due to sticky core inflation, especially housing costs and wage growth. However, economic data since Q2 showed signs of softening: June CPI rose 2.9% year-over-year, core CPI at 3.1%, both below expectations; June nonfarm payrolls added only 152,000, the lowest since 2024, with prior two months' data revised sharply lower. These figures gave the Fed grounds to pivot.

Powell also noted that while avoiding a recession is not the Fed's statutory mandate, "the probability of a soft landing is increasing." He mentioned that consumer spending remains solid, but business investment is slowing, and the labor market is "cooling, not crashing." This indicates the Fed aims to sustain economic growth while achieving its inflation target.

Outlook: September Cut Likely, Focus on Tech Earnings

Based on the current rate path, the FOMC meeting on September 17-18 is in focus. If July and August CPI data continue to improve and the job market doesn't worsen unexpectedly, the Fed will likely deliver its first rate cut since 2025. Most Wall Street banks have raised their year-end S&P 500 targets; Goldman Sachs expects the S&P 500 to reach 6,200 by year-end.

Next week marks a critical phase of U.S. earnings season, with tech giants Apple, Amazon, Google, and Meta reporting results. The market generally expects these companies to benefit from AI investments and cloud growth, with profit growth potentially reaching double digits. If earnings beat expectations, combined with the rate cut catalyst, tech stocks could continue to lead the market higher.

Risks Investors Should Note

• Inflation rebound risk: Geopolitical tensions in the Middle East and potential energy price hikes could boost inflation, forcing the Fed to delay rate cuts.
• High tech stock valuations: The Nasdaq P/E ratio has exceeded 30 times; if earnings disappoint, a correction could occur.
• U.S. election uncertainty: The 2026 midterm elections are approaching, and fiscal policy direction could affect market sentiment.

Overall, this Fed decision set a dovish tone for the second half of the year. Driven by rate cut expectations and earnings growth, U.S. stocks are likely to maintain a volatile upward trend. Investors should closely monitor data over the next two months, flexibly adjust portfolios, and seize sector rotation opportunities.