US markets soared higher on Wednesday afternoon following the Federal Reserve’s final policy decision of the year.
The Dow rose 1.4%, closing at 37,090.24 and blazing past its previous record high of 36,799.65, reached nearly two years ago.
The S&P 500 was up 1.4% and the Nasdaq also gained 1.4% as Wall Street celebrated the US central bank’s announcement that it would keep interest rates steady after almost two years of aggressive rate hikes — and that it expects three rate cuts in 2024.
Wednesday’s stock surge sent the Dow’s year-to-date gains to about 12%. The S&P 500 is also about 2% from a record high and is up 22.6% so far in 2023. The tech-heavy Nasdaq Composite has soared more than 40% so far this year.
“The major takeaway from the December policy meeting is that the Federal Reserve is forecasting a soft landing, full employment and intends to reduce its federal funds policy rate by at least 75 basis points in 2024 to support the ongoing business expansions,” wrote Joseph Brusuelas, chief economist of account firm RSM, in a note Wednesday.
“From our vantage point that is about the best holiday gift a central banker can bestow upon the investment community, policymakers and the public,” he wrote.
A lot of people listen to Federal Reserve Chair Jerome Powell for clues about where interest rates will go in the future. But on Wednesday Powell spoke a lot about lesser-known kinds of interest rates: the neutral and natural.
“Neutral” and “natural” rates of interest are often used interchangeably, but they refer to the same concept.
The term dates back to 1898 when Swedish economist Knut Wicksell wrote: “There is a certain rate of interest on loans which is neutral in respect to commodity prices and tends neither to raise nor to lower them.”
In other words, there’s a Goldilocks interest rate out there. One that isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. In theory, that perfect rate exists in the real world. And it’s likely the missing puzzle piece needed for the Fed to achieve a soft landing, where inflation is tamed but a recession is avoided.
But as Powell pointed out, it’s really difficult to uncover in practice.
When asked by a reporter on Wednesday if he thought there were “significant structural shifts” in the economy post-pandemic, he said it’s hard to know, but “one that comes to mind …. is the question of where the neutral rate of interest is.”
“If it’s risen — and I am not saying that it has — but if it were to have risen, that would mean that interest rates would need to be a little bit higher to convey the same level of restriction,” Powell added.
The Fed predicts interest rates will be considerably lower at this point next year than they are right now, signaling three rate cuts may be in the cards for 2024.
But the Fed also expects inflation won’t return to its target 2% rate until 2026. So why cut rates, which could boost the economy (and inflation along with it) before inflation gets back down to the Fed’s comfort zone?
Since rate hikes take time to work their way into the economy, waiting until inflation reaches 2% may mean the Fed could keep rates too high for too long, potentially tipping the economy into a recession, said Fed Chair Jerome Powell.
“The reason you wouldn’t wait to get to 2% to cut rates is that policy would be too late,” Powell said Wednesday at a post-meeting press conference. “It takes a while for policy to get into the economy, affect economic activity and affect inflation.”
Since March of last year, the Federal Reserve has raised its benchmark interest rate 11 times for a cumulative (and scorching) increase of 5.25 points.
After several months of enduring the highest rates in 22 years, the central bank signaled that three rate cuts could be on the horizon in 2024.
That could have a significant effect on people’s everyday lives: Specifically, borrowing will get cheaper, making it more bearable to buy a home or a car, wrangle credit card debt, or to finance that new furnace or business expansion.
The federal funds rate serves as the basis for banks’ prime lending rates. If those go lower, money goes further for consumers and businesses if they need to finance purchases.
Some of the most immediate effect could be felt on short-term loans, including adjustable-rate mortgages and credit card rates.
At a time when the average credit card interest rate has soared north of 24% and credit card balances have ballooned, lower rates will be welcomed by many, said Joe Brusuelas, chief economist at RSM.
“Lower interest rates across the spectrum [will help] sustain the business expansion and will directly create conditions whereby beleaguered consumers will see direct relief,” he told CNN in an interview.
However, it also means that the United States soon will move past “peak savings rates,” he said.
“One should expect that the risk appetite will return both to markets and households, who will then look at moving money out of CDs and savings accounts into more risky equity positions,” he said.
Although consumer spending had remained reasonably robust throughout the year, Americans have largely pulled back on discretionary items. Revenge travel was so 2022. Treadmills, big TVs and home goods are out.
But that doesn’t necessarily mean the economy is in bad shape. It just means that consumers are taking a pause after they loaded up on items during the pandemic, Fed Chair Jerome Powell said at a press conference Wednesday.
“Maybe people just bought so much stuff that they temporarily don’t want any more stuff; they haven’t got anyplace to put it,” Powell said.
For the third time in a row, the Federal Reserve on Wednesday decided not to raise (or lower) its key interest rate. Consequently, the Fed’s benchmark lending rate will remain at its highest level in 22 years.
Given that the Fed influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy, savers and people with surplus cash still have many opportunities to get a far better return on their money than they’ve had in years — and even more importantly, a return that outpaces the latest readings on inflation.
Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.
The Dow Jones Industrial Average reached an all-time intraday high on Wednesday afternoon after the Federal Reserve announced that it would keep interest rates steady — and that it expects three rate cuts in 2024.
The Dow rose past 37,000 during Fed Chair Jerome Powell’s press conference, beating its previous all-time intraday high of 36,952.65 reached in January 2022.
However, because of the way market highs are recorded, this is not considered a record for the index. That would occur if the Dow ends the day above its previous record close of 36,799.65, also reached in January 2022.
While it may seem like the Federal Reserve has pulled off the miraculous task of bringing down inflation without causing a recession, Fed Chair Jerome Powell said the central bank hasn’t crossed the finish line yet.
Powell said he’s confident the economy isn’t currently in a recession but “there’s always a probability that there will be a recession in the next year.”
There’s a lot of uncertainty about the economic outlook with inflation above the Fed’s 2% target, and the full effects of the central bank’s cumulative rate hikes that kicked off last year have yet to be felt across the economy.
Even though inflation has been cooling down without a significant spike in the unemployment rate, there’s no guarantee that will continue, Powell told reporters in a post-meeting press conference on Wednesday. “No one is declaring victory.”
The Federal Reserve’s actions this year had a powerful impact on housing in the United States.
The four quarter-point rate hikes between February and July of this year saw lingering inflation concerns stoke Treasury yields, sending them higher and dragging mortgage rates higher, too.
Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow. While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them.
The average rate for a 30-year, fixed-rate mortgage hit its lowest level this year at the beginning of February, at 6.09%. February saw existing home sales grow as buyers took advantage of mortgage rates that were lower than at the end of 2022.
But as mortgage rates have trended higher from February’s low for the year, home sales have dropped every month since, falling from a seasonally adjusted annualized rate of 4.55 million in February to 3.79 million in October, the most recent monthly data. And that crushing sales volume has been because of high mortgage rates.
Mortgage rates crossed over 7% in August, reached a high for the year of 7.79% in October and have come down since.
High rates also factor in to the exceptionally low inventory of homes to buy, another reason there are so few homes sold. Homeowners who bought or refinanced into ultra-low rates in the 2%, 3% or 4% range between 2020 and the beginning of 2022 are unwilling to sell and face buying a home at a much higher interest rate.
The housing market is looking for inflation to come under control, which will bring mortgage rates down. Analysts anticipate mortgage rates to fall moderately in 2024. A forecast from the National Association of Realtor’s chief economist, Lawrence Yun predicts the average rate for 2024 will be 6.3%.
Here are some of Wall Street’s initial reactions to the central bank’s latest policy decision to hold rates steady:
The job market has slowed steadily, but remains solid. US economic growth has cooled dramatically from its red-hot pace in the third quarter, but growth remains in positive territory as the year comes to a close. Black Friday and Cyber Monday sales were record setting.
The economy remains resilient in the face of elevated interest rates, which is why some have grown more confident about the prospect of a soft landing — but that still isn’t guaranteed. Even though inflation remains above 2%, the Fed has a lot to be happy about.
But 2024 will certainly put the economy’s resilience to the test. Americans are continuing to draw down their pandemic savings as their credit card balances grow and economists are expecting the Commerce Department to report Thursday that seasonally adjusted retail sales fell in November for the second straight month, according to FactSet.
“Despite significant progress on inflation and strong economic growth, we believe a “soft landing” — where inflation returns sustainably to the Federal Reserve’s target absent weakness in demand — is unlikely.
The last mile on the path to 2% inflation will be the most difficult,” Vanguard said in an analyst note Wednesday.
“In the year ahead, we expect a combination of below-trend growth, rising unemployment, and slowing wage growth. This would occur as the labor market loosens, in large part because of higher-than-expected labor supply growth.”
Officials are expecting inflation to cool next year at a slightly faster pace than they previously estimated, according to their latest set of economic projections released Wednesday.
Some economists say the final mile of the Fed’s historic inflation fight will be the most difficult, and Fed Chair Jerome Powell and other officials say that additional rate hikes remain on the table.
But Wall Street isn’t buying that. The first rate cut could come in March, according to futures, though the odds of a May rate cut are slightly better.
The Fed’s latest estimates also showed that officials now expect there to be more rate cuts next year than previously estimated. That bodes well for America’s frozen housing market hamstrung by high mortgage rates and weak demand.
There are different reasons why the Fed could begin to cut interest rates. One reason is because an economic downturn is ratcheting up unemployment, and another is because inflation is back to the Fed’s 2% target and higher interest rates are unnecessarily weighing on the economy. The Fed could also cut rates because inflation slips below 2%, similar to the years leading up to the Covid-19 pandemic.
For now, some are hopeful the central bank is in the midst of achieving the elusive soft landing — a scenario in which inflation returns to the Fed’s target without a sharp rise in unemployment. Such a feat is extremely rare, with some saying it has only happened once in the 1990s. Others argue soft landings have been a bit more common than that.
Federal Reserve officials think there will be three rate cuts next year, according to median projections in the newly released Summary of Economic Projections. The cuts would bring the Fed’s target interest rate closer to 4.6% from the current range of 5.25% to 5.5%.
The predictions come as officials believe inflation will get closer to their 2% target in the coming year.
Fed Chair Jerome Powell has generally avoided answering questions about rate cuts, saying officials aren’t even talking about it yet. But the new projections are likely to invite fresh questions from reporters during his 2:30 pm ET press conference.
Investors were pleased with the Federal Reserve’s decision to keep rates unchanged on Wednesday afternoon.
The major US indexes remained shot higher following the announcement. The Dow was 226 points, or 0.6% higher. The S&P 500 also grew by 0.6% and the Nasdaq Composite was up 0.6% as well.
Financial markets were factoring in a 98.2% that rates remained unchanged just ahead of the announcement, according to the CME FedWatch tool.
Stocks are tracking towards a winning week after reaching new highs on Tuesday.
The S&P 500 closed at its highest level this year, continuing the stock market’s red-hot rally. The Dow is currently trading at 36,812 above its record closing high of 36,799.65, reached in January 2022. The record intraday high is 36,952.65, also reached in January of 2022.
Financial markets see rate cuts beginning this spring, according to the CME FedWatch tool. Wall Street will listen closely to commentary from Fed Chair Jerome Powell at 2:30 p.m. ET to either affirms or push back on that notion.
Federal Reserve officials believe inflation could slow more than previously thought.
However, it looks like it may take until 2026 until it settles in at the central bank’s 2% target, according to the central bank’s latest economic projections released Wednesday.
The Fed projects that the core Personal Consumption Expenditures index, its preferred inflation gauge, will end the year at 3.2%, down 0.5 percentage points from projections released in September. Fed members see it cooling to 2.4% in 2024 (previously 2.6%), then to 2.2% in 2025 (previously 2.3%); and landing at 2% in 2026.
The core PCE price index currently is at 3.5% for the 12 months ended in October.
Wednesday’s projections also show faster cooling of headline PCE inflation: 2.8% for 2023 (was 3.3%); 2.4% for 2024 (previously 2.6%); 2.1% for 2025 (was 2.2%) and 2% as well in 2026.
Separately, the Fed’s unemployment rate projections held mostly in line with September’s expectations: ending 2023 at 3.8% and rising to 4.1% the next three years. As of November, the United States had an unemployment rate of 3.7%.
The Fed expects stronger economic growth for 2023: GDP of 2.6% versus 2.1% projected in September. Additionally, the projections show slightly slower economic growth next year of 1.4%, a touch below the 1.5% projected in September.
The Federal Reserve released its latest policy statement Wednesday, which explains the central bank’s reasoning behind its policy decisions. The Fed announced Wednesday that it is keeping rates on hold for the third consecutive time. There were a few changes.
The first paragraph noted that economic activity “has slowed from its strong pace in the third quarter,” compared to the November statement noting that activity “expanded at a strong pace.”
Notably, the latest statement also said that “inflation has eased over the past year but remains elevated,” which is a change from the usual sentence simply stating that “inflation remains elevated.”
The rest of the statement kept the same language.
The Federal Reserve said Wednesday it will hold interest rates steady at a 22-year high for the third consecutive meeting, as US economic growth slows and investors look toward the beginning of rate cuts sometime next year.
The Fed has raised rates 11 times since March 2022 to combat high inflation, which has slowed markedly after hitting a four-decade high last summer.
Inflation slowed down again in November, with prices across all goods and services rising at a weaker pace of 3.1% on an annual basis, according to the latest Consumer Price Index. That’s a big improvement from November 2022 when prices rose at a pace of 7.1% compared to November 2021.
But do the numbers really make any difference if you’re still struggling to afford so many of your needs and wants?
Suppose the temperature at the start of one month was 50 degrees and by the end of the month it reached 90 degrees. The next month is still hotter, but the temperature only went up by five degrees over the course of the month. You’re probably not thinking, “Thank goodness the temperature only rose by five degrees this month and not 40.” Rather, you’re much more likely to take note of how hot it is outside.
The same thing has been happening with inflation. Prices across most goods and services are much higher than two years ago. But the pace of the price increases has slowed.
And that’s just one of the reasons why people are having a harder time getting by even though inflation is cooling.
Treasury Secretary Janet Yellen is optimistic that the Federal Reserve’s 2% annual inflation rate target could be achieved by the end of 2024.
“My expectation is that inflation will continue to come down,” Yellen, a former Fed Chair, said in an interview with CNBC on Wednesday. “When we come to the end of 2024, two is likely to be the first numeral [of the inflation rate],” she said.
That aligns with Fed officials’ forecasts.
In the most recent Summary of Economic Projections from the Fed’s September meeting, the median prediction for inflation in 2024 was 2.5%. But officials don’t see inflation coming down to a firm 2% until 2026. Fed officials’ updated predictions about the economic trajectory are set to come out at 2pm ET on Wednesday along with the Fed’s decision on interest rates.
Inflation currently hangs above 3%, according to the Fed’s preferred inflation gauge, the Personal Consumption Expenditures index.
That said, Yellen isn’t ruling out a recession. “There is always a recession risk,” she said. But at the moment, that risk isn’t “particularly high,” Yellen added.
The Federal Reserve has a lot of sway over the US economy and financial markets. But there’s one thing it doesn’t have: the ability to get interest rates to the exact level it wants.
How could that be? Doesn’t the Federal Reserve control interest rates?
Actually, no, it doesn’t.
While you may have read that Fed officials voted to raise, lower or hold interest rates steady after their monetary policy meeting, what they’ve actually voted on is the target range for the federal funds rate.
That range determines the actions the central bank will take behind the scenes through the use of its multitrillion-dollar balance sheet to influence borrowing costs across the economy on everything from mortgages to commercial loans.
