Stocks struggle after the Fed eases up on rate hikes

At the end of the Federal Reserve’s two-day meeting today, the central bank will release its economic outlook. That forecast, which is updated four times a year, includes a chart that plots out an array of dots, showing where each of the Fed’s 19 leaders expect interest rates to go in the future.

Former Fed chair Ben Bernanke first created the dot plot in 2012, mostly as a way to assure the public that Fed leaders planned to keep interest rates low for the time being. 

Now, the opposite is true: The dots have become a signal that interest rates will remain elevated into the future — spooking investors and Fed watchers alike.

The problem is that it’s difficult to predict what the future actually holds. As economic data changes, so do Fed projections.

Federal Reserve Chair Jerome Powell warned last year that “the dots are not a great forecaster of future rate moves,” and that they should be taken “with a big, big grain of salt.” 

But that doesn’t stop investors from reading into them.

Back in December 2021, the Fed was only expecting rates to finish this year at about 0.9%. Goldman Sachs analysts said this week they expect the median “dot” to rise to a new peak in federal fund rates of 5%-5.25%, up from 4.5%-4.75% in September.

That would mean Fed officials expect to raise rates by half a percent more than they did three months ago, when the plot was last released.

Delta Air Lines raised its guidance for fourth-quarter revenue and said it expects profits to grow even more in 2023 and 2024.

The Atlanta-based airline raised its fourth-quarter guidance to between $1.35 to $1.40 a share, up from its earlier guidance of $1 to $1.25. Analysts surveyed by Refinitiv had a consensus earnings-per-share forecast of $1.15.

The company also raised its fourth-quarter revenue target and said its profit margin should be at the top end of its earlier guidance.

"Demand for air travel remains robust as we exit the year and Delta's momentum is building," said Delta CEO Ed Bastian.

The new guidance would give Delta full-year earnings of between $3.07 to $3.12 per share. It said it expects 2023 earnings of between $5 to $6 per share, and 2024 to top $7.

The more bullish profit guidance comes even as Delta recently reached a tentative labor agreement with its pilots that would grant them a 34% raise, including backpay, over the next three years. The pilots are the only major employee group at Delta to have union representation, unlike most other airlines that are more broadly unionized.

Shares of Delta jumped nearly 5% in premarket trading on the guidance, and it also lifted the shares of other major airlines about 1%. Shares of Delta are still down for the year, as are most US airline stocks.

US stock futures were flat ahead of the Fed’s last rate hike decision of the year. Investors have cheered expectations that the Fed will raise rates by only a half point, but fear higher rates in the long run that could send the economy into a recession. 

Dow futures were up 20 points, or 0.1%. S&P 500 futures were flat, and Nasdaq Composite futures were also unchanged. 

Fear & Greed Index: 61 = Greed

Oil & gas: US oil rose 0.9% to just over $76 a barrel. Average US gas prices fell to $3.21 a gallon. 

The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer.

Even if interest rate hikes ease, they will remain high, and economists are largely expecting that the US economy will endure a recession next year. Powell said in November that there is still a chance the economy avoids recession but the odds are slim, noting: “To the extent we need to keep rates higher longer, that’s going to narrow the path to a soft landing.”

In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen — Powell’s predecessor at the Fed — said there is “a risk of a recession. But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

And the economy has so far withstood the Fed’s aggressive rate hikes. The job market is healthy, wages are growing, Americans are spending and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.

The Federal Reserve is expected to announce on Wednesday yet another interest rate hike – this time, investors hope, it will be a smaller increase of a half-point rather than the three-quarters of a percentage point hike of the last four increases. 

For White House officials, who refrain from commenting on policy decisions of the central bank, that half-point increase will be seen as more welcome news.

A less aggressive interest rate hike, capping a year plagued by historically high inflation, would serve as one more piece of affirmation that inflation is moderating in the US – and that Powell has taken note.

The Fed’s interest rate hikes affect everything from mortgage rates to car loans, key measures that White House officials are keenly aware have a deep impact on American consumers’ psyches and outlook about the state of the economy.

On Tuesday, the Consumer Price Index provided the latest evidence that inflation is cooling, and was particularly encouraging given that it marked the fifth consecutive month of declining US inflation.

A number of other recent economic data points have also given the Biden White House reason for cautious optimism: moderating prices including gas, car and airline prices; continued strength in the labor market; and strong GDP growth.

And while White House officials are careful to avoid predicting that inflation has peaked, President Biden walked right up to the line of saying precisely that on Tuesday.

He is “convinced,” Biden said, that prices are “not going to go up” any further.

“I’m convinced they’re going to continue to go down,” Biden told reporters.

The Federal Reserve is expected to raise interest rates by half a point at the conclusion of its two-day policy meeting on Wednesday, an indication that the central bank is pulling back on its aggressive stance as signs begin to emerge that inflation may be easing.

Although that increase would be smaller than the three-quarter-point hikes announced at the past four Fed meetings, it’s nothing to scoff at.

It’s still double the Fed’s customary quarter-point hike, and a sizable increase that will likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.

The Fed’s anticipated action would increase the rate that banks charge each other for overnight borrowing to a range of between 4.25% and 4.5%, the highest since 2007.

Federal Reserve Chairman Jerome Powell confirmed last month that smaller rate hikes could be expected, saying: “The time for moderating the pace of rate increases may come as soon as the December meeting.”

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