Traders weigh odds for steep Fed rate cut

Technology and health care companies drove U.S. stocks to a lower finish Monday as the market fell for a second straight day following a run of record highs.

The selling came amid growing speculation on Wall Street that an unexpectedly strong pickup in U.S. employment growth last month may keep the Federal Reserve from aggressively cutting its benchmark interest rate. Many investors still expect a cut of a quarter percentage point, but fewer are now expecting a half-point reduction.

The market rallied through much of June after the central bank signaled that it’s prepared to lower interest rates to offset slowing global growth and the fallout from U.S. trade conflicts. The benchmark S&P 500 index closed at record highs three days in a row last week before stumbling Friday following a report showed U.S. employers added a robust 224,000 jobs in June and stoked uncertainty about the Fed’s next move on interest rates.

“We’re getting an equity market that is taking a breather after five weeks of superb performance,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “And we’re on the eve of the beginning of second quarter earnings season, so it’s simply an equity market taking a breather between those events.”

The S&P 500 fell 14.46 points, or 0.5%, to 2,975.95. The index is now about 0.7% below its all-time high set Wednesday.

The Dow Jones Industrial Average slid 115.98 points, or 0.4%, to 26,806.14. The Nasdaq composite lost 63.41 points, or 0.8%, to 8,098.38. The Russell 2000 index of smaller company stocks dropped 14.24 points, or 0.9%, to 1,561.39.

Major stock indexes in Europe also finished lower.

The Fed’s benchmark interest rate currently stands in a range of 2.25% to 2.5% and the central bank has not cut rates since the Great Recession in 2008. Last year, Fed officials raised rates four times, in part to stave off the risk of high inflation and in part to try to ensure that they would have room to cut rates if the economy stumbled.

On Friday, the Fed emphasized that it would act as necessary to sustain the economic expansion, while noting that most Fed officials have lowered their expectations for the course of rates. The Fed’s statement came in its semiannual report on monetary policy.

Investors will be listening closely for any hints on the central bank’s interest rate policy on Wednesday and Thursday, when Powell delivers the Fed’s semiannual monetary report to Congress.

“Looking to the Fed funds futures markets, you see the potential for one to two more additional rate cuts between now and yearend,” Northey said. “There’s a trajectory of easing that is likely to be forthcoming, that is already reflected in capital markets and not likely to change materially based on the testimony later this week.”