U.S. equity and government bond markets soared Wednesday on signs the Federal Reserve has pivoted from raising interest rates to cutting rates. The S&P 500 ($SPX) (SPY) and Nasdaq 100 ($IUXX) (QQQ) rallied to 23-month highs today, and the Dow Jones Industrials ($DOWI) (DIA) climbed to a record high. The 10-year T-note yield fell to a 4-1/2 month low today at 3.884%.
The markets are now pricing in six quarter-point rate reductions in 2024 by the Fed, twice the number that FOMC members forecasted in the Fed dot-plot on Wednesday. Goldman Sachs said, “The FOMC delivered a dovish message at Wednesday’s meeting,” which prompted Goldman to revise its outlook for the Fed. Goldman Sachs now expects the Fed to begin cutting rates by 25 bp in March and continuing in May and June, with further cuts every quarter until the fed funds target range falls by an overall 2 percentage points to 3.25%-3.50% from the current 5.25%-5.50%.
However, there is no guarantee that the current euphoria about a Fed pivot will last. Markets have speculated about interest rate cuts numerous times over the past two years, only to be proven wrong when the Fed didn’t shift. On Wednesday, the FOMC voted unanimously to keep the fed funds target range at 5.25%-5.50%, and Fed Chair Powell said officials are prepared to raise interest rates again if inflation picks up.
On Wednesday, the FOMC penciled in no further interest rate hikes in their projections for the first time since March 2021. William Dudley, former President of the New York Fed, said Wednesday’s post-FOMC meeting comments from Fed Chair Powell have “basically added fuel to the fire” in financial markets as he refrained from pushing back on the market’s dovish expectations. Powell said he believes the policy rate is at or near the peak for this cycle and that policymakers discussed the timing of rate cuts.
The Fed also tweaked its FOMC policy statement, signaling a shift in tone among policymakers, with officials noting they will monitor a range of data and developments to see if “any” additional policy firming is appropriate. That word was not present in the FOMC’s November policy statement. The wording was in stark contrast to comments made by Fed Chair Powell earlier this month when he said it would be “premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when policy might ease.”
The markets are now discounting the chances for a -25 bp rate hike at 97% for the March 19-20, 2024, FOMC meeting. The federal funds futures market is now discounting an overall -145 bp rate cut by December 2024.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
