Wall Street Treads Water as Traders Brace for Fed Rate Cut Call

CNBC, the Wall Street Journal, Investor’s Business Daily, Bloomberg, AP, and Reuters contributed to this report.

The stock market was basically stuck in neutral Wednesday morning as investors waited for the Federal Reserve to make its final interest rate call of the year.

The S&P 500 slipped about 0.1%, dragged down in part by a more than 2% drop in Microsoft. The Dow Jones Industrial Average inched up around 55 points (0.1%), while the Nasdaq Composite fell roughly 0.4%.

It’s all about the Fed. Markets are betting heavily that the central bank will deliver its third straight quarter-point rate cut on Wednesday afternoon, with futures pricing in about a 90% chance of a move, according to CME’s FedWatch tool. But what happens after that is far less clear.

Inside the Fed, policymakers are split:

• Some want more cuts to protect a cooling labor market.
• Others worry that easing too much could reignite inflation, which is still running above the Fed’s 2% target.

“Market expectations for the Fed have turned sharply dovish, raising the risk of outsized reactions if the Fed delivers a hawkish surprise,” said Vittoria Volta of Bank of America.

With a new Fed chair likely coming and a pile of delayed economic data after the government shutdown, she warned December could be more surprising — and more volatile — than usual.

The S&P 500 is still sitting just about 1% below its record high set on Oct. 28, right before the last Fed decision. Stocks stumbled after Chair Jerome Powell signaled in late October that a December cut wasn’t guaranteed, then bounced back in late November as Fed officials started hinting that one might be on the table.

Under the surface, the market has started to shift. Small caps are finally waking up: the Russell 2000 hit a fresh all-time intraday high on Tuesday, helped by the prospect of lower rates. Smaller companies tend to benefit more from rate cuts because their borrowing costs are closely tied to market rates.

Doug Beath of Wells Fargo Investment Institute said the renewed strength in small caps fits with his view that market leadership is broadening out. He thinks investors are already looking past today’s “soft patch” toward stronger growth through 2026, helped by tax cuts, deregulation, more Fed easing and continued tech spending.

For now, though, it’s simple: Wall Street is holding its breath until 2 p.m. ET, when the Fed announces its decision — and even more importantly, what Powell says about 2026 in his press conference.