Stocks sink as Fed hints rate cuts aren’t coming soon

Most of the Federal Reserve’s post-meeting statement that was released at 2 pm ET read almost exactly like statements from prior recent meetings. But small changes were made that carry big implications.

In the past several meetings the statement included a line stating, “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time,” these are the conditions and/or circumstances that will be considered.

That line was removed altogether at January’s meeting, implying that Fed officials no longer believe it’s worth keeping the door open for more rate hikes.

But the statement continued to say that inflation “remains elevated.” If the central bank did away with it and replaced it with something more neutral, it could’ve meant the central bank was getting ready to cut rates, Sarah House, a senior economist at Wells Fargo, told CNN.

The statement did, however, include a new line saying: “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.”

Regional bank stocks are back in the hot seat thanks to New York Community Bancorp.

On Wednesday, the regional lender reported a surprise loss of $252 million last quarter compared to a $172 million profit in the fourth quarter of 2022. The company reported $552 million in loan losses, a steep increase from $62 million the prior quarter.

Shares of the stock plunged off the news and were down 37% around 1 pm ET.

The bank’s stress is bringing down other regional bank stocks with KBW Regional Banking Index down around 3%.

Smaller, regional banks have largely recovered from heightened stress resulting from three bank failures last year. But New York Community Bancorp’s troubles may open up fresh wounds.

The New York Stock Exchange on Wall Street is pictured on January 31.

US stocks were mixed on Wednesday afternoon as investors awaited the outcome of the policy meeting of the Federal Reserve.

The Dow was up 39 points, or 0.1%. The S&P 500 fell by 0.7% and the Nasdaq Composite was 1.1% lower.

The drops came after major tech companies reported earnings results that disappointed Wall Street.

Shares of Google-parent company Alphabet were 6.6% lower and Microsoft fell by 1.3% after the tech behemoths reported corporate earnings for the fourth quarter of 2023 on Tuesday afternoon.

While Google and Microsoft surpassed Wall Street’s estimates and the pullback indicates that there’s a very high bar for Big Tech to meet this earnings season.

The sour mood sent the entire so-called Magnificent Seven lower on Wednesday. Shares of Apple were down 0.9%, Meta stock fell by 1%, Amazon dropped 1.1% and Nvidia was 1.8% lower. Tesla stock was flat.

This week marks the busiest week of earnings with more than 100 companies representing about 40% of index earnings scheduled to report.

The Fed is set to announce its first interest rate decision of the year at 2 pm ET.

A job seeker attends a Veteran Employment and Resource Fair in Long Beach, California, on January 9.

The number of available jobs in the United States unexpectedly rose last month, according to Bureau of Labor Statistics data released Tuesday.

But the labor market is still cooling down.

The United States had an estimated 9.026 million job openings in December, according to seasonally adjusted data released as part of the BLS’ monthly Job Openings and Labor Turnover Survey (JOLTS) report. That total is higher than the upwardly revised 8.925 million available jobs estimated for November.

Economists had expected December job openings to drop for a fourth consecutive month and land at 8.714 million.

“We’re back over the 9 million mark, which is a three-month high, and the bulk of the gains were in the private sector,” Jennifer Lee, senior economist with BMO Capital Markets, wrote in a note issued Tuesday. “So the good news is that there are options out there — if one is still unemployed or is looking for extra work. The bad news is that it means that the consumer could spend more, and that’s not what the Fed wants right now.”

The Federal Reserve has been hoping to see more slack in the labor market to help in the central bank’s fight to bring down inflation. When there’s an imbalance in the supply and demand for workers, it could cause wages to rise and, in turn, prompt companies to raise prices.

Read more here.

The last time the Fed cut rates was at the onset of the pandemic, slashing rates to near-zero levels. Fed Chair Jerome Powell explained the cuts were needed to counter the dangers that Covid posed to the economy.

Before the pandemic, the Fed cut rates in 2019 as the trade war between the United States and China was heating up. The first of three cuts that year came in July.

Powell characterized those as “mid-cycle adjustments,” meaning this was not the start of a lengthy round of rate cuts, but rather a minor tweak to reroute the economy.

That’s very different from what the Fed would do “when there’s a recession or a very severe downturn,” Powell said at the central bank’s July 2019 post-meeting press conference.

There are two primary reasons the Fed lowers its benchmark lending rate.

One of those comes “when something goes wrong in the economy,” said Justin Weidner, a US economist at Deutsche Bank. That was the premise for rate cuts that began in 2007, 2001 and 1990, which marked the start of different recessions.

The second reason is to make cuts preemptively in response to data that shows the economy is losing steam — or after events like 9/11 “that could be thought to generate weakness across the economy,” said Michael Gapen, head of US economics at Bank of America Securities.

But this year’s rate cuts could be “different than any other time,” Gapen said.

In his view, the Fed would cut because inflation has moved closer to the central bank’s 2% target. That would make the current interest rate level overly restrictive and put a drag on the economy, he said.

Federal Reserve Chair Jerome Powell holds a press conference in Washington, DC, on December 13.

With most of Wall Street in agreement that there will be no rate cut or rate hike at the conclusion of the Fed’s meeting Wednesday, investors are focused on Fed Chair Jerome Powell’s afternoon press conference, where he’ll answer questions about his outlook for monetary policy.

And if past performance is any indicator of future results, there’s a lot resting on Powell’s guidance. We can guess what might happen: If he hints that cuts are coming, markets will likely respond with glee. If he suggests that interest rates will stay higher for longer, we can expect stocks to sink.

But analysts say Powell isn’t as influential as we’ve been led to believe.

Researchers at Bespoke Investment Group mapped the performance of the S&P 500 index against the probability of a rate cut at the March meeting and found the two aren’t necessarily correlated.

The odds that the central bank cuts rates in March, based on federal funds futures, have halved since late December. But over that same period, the S&P 500 has risen by more than 3.5%.

Read more here on why studying the subtleties of Powell’s news conference might not be Wall Street’s best use of time.

Sen. Sherrod Brown leads a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in June 2023.

Sen. Sherrod Brown, the chairman of the Senate Banking Committee, wrote a letter to Powell Tuesday, urging the Fed to cut rates “early this year.”

Brown wrote that it is “becoming increasingly evident that restrictive monetary policy is no longer the right tool for combatting inflation.”

The letter from Brown comes just days after Sen. Elizabeth Warren blasted the Fed for making housing unaffordability worse.

In a Sunday letter to Fed Chair Powell, shared first with CNN, Warren expressed alarm at how “astronomical” mortgage rates have made a bad situation worse and urged Fed officials to start cutting borrowing costs.

“We urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” Warren and fellow Democratic Sens. John Hickenlooper, Jacky Rosen and Sheldon Whitehouse wrote.

“Come on, Fed! Turn it around and drop those interest rates,” Warren told CNN’s Kate Bolduan on Monday.

Read more here.

Homes in Pinole, California, US, on December 26, 2023.

Rate cuts could “inject activity into the currently sluggish mortgage origination market,” said Michele Raneri, vice president of US research and consulting at TransUnion.

“Since the 2020-2021 dip in 30-year mortgage rates spurred an uptick in home purchase activity, there are many potential homebuyers on the sidelines waiting for meaningful rate reductions before making a purchase,” she said in a note Tuesday.

That means that if the Fed does roll out its predicted three rate cuts — or more — “it is quite likely that the mortgage origination market will see the beginnings of a meaningful rebound shortly thereafter,” she said.

US wage growth cooled in the final months of 2023 to its slowest pace in more than two years, according to a gauge closely watched by the Federal Reserve, offering the latest evidence of easing inflationary pressures.

The Employment Cost Index, a comprehensive measure of employers’ labor costs, rose 0.9% from October through December, new data released Wednesday showed.

That represents a slowdown from the 1.1% gain in the third quarter and below what economists were expecting, according to FactSet estimates. The index takes into account wages and benefits paid to US workers.

Still, the fourth quarter’s increase was above anything seen in the decade leading up to the Covid-19 pandemic. The ECI never breached 0.8% on a quarterly basis from 2008 to 2020. Excluding benefits, wages rose 0.9% in the fourth quarter, an even steeper slowdown from the 1.2% registered in the third quarter.

The latest ECI reading points to a cooling job market, which bodes well for slower inflation and, eventually, rate cuts.

“We continue to expect a moderation in wage gains in the coming months as labor market conditions soften and labor demand comes into better alignment with labor supply,” Gregory Daco, chief economist at EY-Parthenon, said in a note Wednesday.

“In a world where wage growth is moderating, pricing power is diminishing and monetary policy remains restrictive, we believe inflation will continue to move toward the Fed’s target,” he said.

Wage and benefits growth in service-providing industries, such as education and health care, slowed in the fourth quarter, while it picked up for manufacturers. Pay gains among US workers in retail, finance, construction and utilities cooled from October through December, while it rose substantially in transportation and warehousing, up to 3.1% from 0.8%.

The Federal Reserve building is seen in Washington, DC, on January 26, 2022.

Federal Reserve officials have said countless times they take a “data-dependent approach” to their policy decisions, including their current conundrum of when to slash interest rates. But what if the data isn’t as dependable as it once was?

That’s what appears to be happening — and it’s making central bankers’ jobs a lot harder.

“We have to make decisions in real time,” Fed Governor Christopher Waller said late last year. “Whatever data is released, that’s the data I have to use. The problem with data is it gets revised.”

That wouldn’t necessarily be so much of an issue if the revisions, which can come months after initial reports are released, were relatively small. However, many revisions over the past few years have been game-changers.

It’s nearly impossible to say with certainty, for instance, how much prices rose or how many people were hired at a given point in time across an entire country’s economy. That’s why the government and other economic data providers often rely on surveys to make sophisticated estimates.

New York Fed President John Williams told CNN he accepts that the preliminary government data he has available at monetary policy meetings is likely to change by the time officials meet again.

That’s why he takes into account as much outside data as possible, often from private sector data providers, to give him a better sense of what’s happening in the economy.

“We want to be data dependent, but not data point dependent,” Williams said. “I try not to get too excited about every data point that we see.”

Read more here.