U.S. markets are surging higher on Tuesday on news that the Federal reserve intimated that it will step in if necessary to ease monetary policy and save the economy, as well as trade tensions softening amid comments by China and Mexico.

The Dow Jones Industrial Average climbed 458 points, or 1.9%, as of 1:30pm ET. The S&P 500 rebounded 1.8% and the Nasdaq Composite rallied 2.2%. Stocks that have been hit hard during the month-long sell-off led Tuesday’s comeback, including Apple and bank shares.

“The market wanted to hear from Powell. When Powell says ‘we are watching the market’ — whether it’s right or wrong — the market starts believing in a Powell put,” said Keith Lerner, chief market strategist at SunTrust Private Wealth. He also noted “sentiment became extremely negative on a short-term basis.”

Powell stated that the central bank will “act as appropriate to sustain the expansion.” He remarked, however, that the Fed does is not clear “how or when” global trade issues will be resolved. “We are closely monitoring the implications of these developments for the U.S. economic outlook.”

The Fed chair’s comments come during a period of broadening expectations for a Fed rate cut. The CME FedWatch tool, a closely watched indicator for Fed action, indicated a 90% chance of a September rate cut. Anticipations for a second rate cut in December were also greater than 80%.

“We find the impact of Trump’s trade war and more broadly a shortening timeline for the Fed’s impending ‘insurance cut,’” Steven Blitz, chief U.S. economist at TS Lombard, wrote in a note. “Even if Trump ends it more quickly than currently anticipated, the lagged impact of tight money (as indicated by the curve late last year) now meeting up with fading fiscal stimulus suggests a cut is warranted sooner than later.”

The Fed has said it was taking a respite in its rate-hiking cycle, effectively hitting the pause button while it watches the economy. Increasingly, though, economists have shied away from the view that the Fed’s next move will be a rate increase, and traders have been anticipating a cut for several months.

But with the recent volatility, a rapidly sinking stock market, and expectations they would come to the rescue in the face of an ensuing dual front trade war, perhaps the central bank felt it prudent to instill some confidence in investors and the market.

For more investing news and strategies, visit ETFtrends.com.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.