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Wall Street notches mild gains as Fed hints at potential rate cuts

U.S. stocks inched higher on Wednesday, as the market was buoyed by U.S. Federal Reserve's loosening stance on monetary policy after a two-day meeting closely watched by market participants.
The Dow Jones Industrial Average rose 38.46 points, or 0.15 percent, to 26,504.00. The S&P 500 increased 8.71 points, or 0.30 percent, to 2,926.46. The Nasdaq Composite Index rallied 33.44 points, or 0.42 percent, to 7,987.32.
By sectors, eight of the 11 primary S&P 500 sectors traded higher around the closing bell, with the health care sector up over 1 percent, leading the gainers.
Yet the financials sector, which normally benefits from rate hikes, extended a loss of over 0.2 percent. Among the worst performers, shares of Bank of America Corp and JPMorgan Chase declined over 1 percent and over 0.7 respectively.
The Fed decided to hold federal funds rate steady at 2.25 to 2.5 percent, yet hinted at possible rate cuts later this year, saying it "will act as appropriate to sustain expansion."
Noting that uncertainties about the economic outlook "have increased," the central bank dropped the "patient" language shown in its previous statements.
"In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion," said the Fed in a statement on Wednesday afternoon.
"The Fed left rates on hold but sent a clear message - the next move is a cut. The only question now is the timing," said Bank of America Merrill Lynch (BofAML) in a research report on Wednesday.
During the meeting, nine of the ten members of the Federal Open Market Committee voted for maintaining rate at its current range.
However, St. Louis Fed President James Bullard was the only official voting against unchanged rates, as he wanted to lower target range for the benchmark rate by 25 basis points.
During a press conference after the meeting, Fed Chair Jerome Powell said the Fed saw headline inflation falling further to 1.5 percent this year, adding that weaker global growth could pull down global inflation.
He also mentioned that updates regarding trade have been an important driver of market sentiment.
As the Fed's messages exceeded market expectations, Wall Street "seems to be satisfied with the promise from the Fed that they stand ready to ease and will react as appropriate based on how the 'cross currents' evolve," according to BofAML.
In this regard, Swiss investment bank UBS also held that the central bank has clearly conveyed a willingness to "remain accommodative" and would provide "additional stimulus" if economic conditions deteriorate.
"We believe this is a favorable backdrop for carry trades," UBS said in a research note on Wednesday.
A more dovish Fed has markedly eased pressure on equities and fueled investors' bets on fresh rate cuts for the remainder of the year.
The Cboe Volatility index, widely considered the best fear gauge in the stock market, decreased 5.41 percent to 14.33 on Wednesday.
Investors' bullish anticipation on the Fed's possible stance had propelled the three benchmark indexes to surge on Monday to the highest levels since May, adding to June's constant rally.
The Dow even once skyrocketed over 400 points several hours after the meeting kicked off on Monday morning.
More surprisingly, the probabilities of "ease" in Fed's interest rates surged all the way to 100 percent around Wednesday's closing bell, just two hours after the Fed's announcement, according to the CME Group's FedWatch tool.
That indicated major market players' belief that rate cuts could become certain later this year.
"The next two weeks will be absolutely critical to determining the timing of the move," said BofAML, adding that Fed officials' public remarks, data on payroll and manufacturing, as well as the upcoming G20 summit would be determining factors that guide markets.

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