GLOBAL MARKETS-Wall Street droops, dollar edges back after bumper Fed cut

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Fed makes bumper 50 basis point cut

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US stock indexes jump then pare gains

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Dollar regains ground, Treasury yields rise

(Updates prices at 4:50 p.m. ET (2050 GMT))

By Isla Binnie

NEW YORK, Sept 18 (Reuters) - Major stock indexes closed with modest losses and the dollar gained ground in choppy trading on Wednesday after the U.S. Federal Reserve opted for a supersized cut in its first move to borrowing costs in more than four years.

The central bank cut the overnight rate by half a percentage point, more than the quarter-point that is customary for adjustments, citing greater confidence that inflation will keep receding to its 2% annual target.

That rate, which guides how much interest banks pay each other and affects rates for consumers, is now 4.75%-5.00%, the lower end of the range markets had been expecting.

The benchmark S&P 500 rose as much as 1% after the announcement before retreating to close down 0.29% at 5,618.26.

"It's important to note that stocks are not rocketing ahead (at least not yet) after getting what they wanted. After seven straight up days, a lot of good news was priced in," said Steve Sosnick, chief market strategist at Interactive Brokers in Greenwich, Connecticut.

The Dow Jones Industrial Average closed down 0.25%, at 41,503.10, and the Nasdaq Composite shed 0.31%, to end at 17,573.30.

Rates had been parked at their highest levels in more than two decades since July 2023.

MSCI's index of world stocks rose to a record high during the session before turning south. It was last quoted down 0.29% at 826.29.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, weakened after the announcement before rising 0.07% to 100.98.

In the market for U.S. government debt, yields on rate-sensitive 2-year Treasuries, rose 3.8 basis points to 3.6297%, from 3.592% late on Tuesday.

The yield on benchmark 10-year notes rose 6.6 basis points to 3.708%, from 3.642% late on Tuesday.

A BIG BITE TO START

Attention quickly turned to what the Fed would do next as it seeks to fulfil its two-part mandate to promote maximum employment and stable prices.

Chair Jerome Powell said he saw no sign of a recession, citing solid growth, lower inflation and "a labor market that's still at very solid levels". He also said the Fed might have started cutting sooner, on the back of a surprisingly weak July jobs report, if it had seen that data earlier.

Markets are now fully pricing in a cut of at least 25 basis points at the central bank's next meeting in November, with a roughly 40% chance for another 50 basis point cut.

"There's a ton of room to go lower here, combined with what I would call wobbly labor data, wobbly not terrifying... They took a big bite to start," said Tom Herrick, chief market strategist at Cary Street Partners in Richmond, Virginia.

Next up on a busy policy calendar is a Bank of England meeting on Thursday, which financial markets anticipate will keep interest rates on hold. The Bank of Japan is expected to do the same on Friday.

On Wednesday afternoon following the Fed meeting, the Japanese yen strengthened 0.11% to 142.24 per dollar. Sterling strengthened 0.28% to $1.3193.

Gold XAU= fell 0.62% to $2,553.67 an ounce, having touched record highs earlier this week.

Oil prices fell, as the rate cut was seen as a response to unease about the U.S. labor market. Brent crude settled at $73.65 a barrel, losing 5 cents.

(Reporting by Kevin Buckland in Tokyo and Sruthi Shankar in London; Editing by David Evans, Nick Zieminski and Jamie Freed)