Summary
The Federal Reserve decided on Wednesday, as expected, to keep the key interest rate unchanged at its highest level in 22 years. The Fed also released new forecasts indicating that officials at the central bank expect three rate cuts next year.
Powell’s Statements
Federal Reserve Chair Jerome Powell said in a press conference that interest rates are likely at or near their peak during this tightening cycle. Officials at the Fed are now discussing when to cut rates, but they are not ruling out the possibility of further increases in the future.
Impact of the Decision on Markets
The Dow Jones Industrial Average rose 1.4%, climbing more than 500 points to reach 37,000 points for the first time and closed at 37,090 points. The Nasdaq and S&P 500 also rose 1.4% to close at their highest levels since January 2022. Government bond yields fell, with yields on the benchmark 10-year Treasuries dropping to their lowest level in five months at around 4.01%.
Market Expectations for Rate Cuts
Market optimism has increased regarding the possibility of interest rate cuts next year. Fed fund futures trading indicates that market participants see a 75% chance that the Fed will start cutting rates at its March meeting, up from approximately 50% before the Fed’s announcement regarding its interest rate decision, according to CME Group’s FedWatch tool. The market expects interest rates to decline by at least 100 basis points by the end of 2024, with many anticipating deeper cuts.
Fed Officials’ Forecasts
Officials at the Fed expect a soft economy to occur after a period of high inflation, rather than the typical collapse that generally follows rapid price increases and rate hikes by the Fed. Meeting participants expect GDP to grow at a modest rate of 1.4% in 2024, a rate well below the strong growth of 5.2% in the third quarter of this year and lower than the September forecasts, but not a recession, with the unemployment rate rising to 4.1% from the current rate of 3.7%, and no mass layoffs as some had feared earlier this year.
Impact of the Decision on Investors
Charlie Ripley, senior investment strategist at Allianz Investment Management, said, “Investors can now fully believe that the Fed has finished raising rates for this cycle.” He added, “Moreover, the dovish tone stemming from the meeting minutes with a 75 basis point cut not only suggests that the Fed is declaring victory over inflation but also lays the groundwork for Powell and his team to achieve a soft landing for the economy.” Ripley noted that the Fed retains the option to tighten monetary policy if necessary to keep inflation in check, adding that “investors should be cautious about the pace and timing of the cuts so as not to get ahead of themselves.”
Impact of the Decision on Financial Markets
U.S. stocks rose following the Fed’s announcement to keep interest rates steady and release forecasts indicating that the central bank expects three rate cuts next year. After fluctuating for much of the session prior to the announcement, the S&P 500, Nasdaq Composite, and Dow Industrials rose by 0.6% around 15 minutes after the announcement. All three indices are approaching their highest levels of the year, in hopes that the Fed will be able to begin cutting rates soon. Government bond yields fell, with yields on the benchmark 10-year Treasuries dropping to 4.09%, down from around 4.15% before the announcement. The yield on the 10-year Treasuries had reached 5% in late October.
Forecasts
Markets Expect Interest Rate Cuts
Market participants now expect a 60% chance that the Fed will cut interest rates at its March meeting, according to CME Group’s FedWatch tool. Data also indicates a 90% chance that the Fed will reduce interest rates by at least one percentage point by the end of 2024. Markets are reading cautious signals in the Fed’s statement, which added language acknowledging the economic slowdown and declining inflation.
Fed Officials’ Expectations
The Fed expects to cut the benchmark interest rate by 75 basis points by the end of next year. The last time members of the Fed’s Monetary Policy Committee made forecasts in September, they had only projected a 25 basis point cut.
The Impact of the Decision on Financial Markets
U.S. stocks rose after the Fed announced its decision to keep interest rates steady and issued forecasts indicating that the central bank expects three rate cuts next year. After fluctuating for most of the session before the announcement, the S&P 500, Nasdaq Composite, and Dow Industrials rose by 0.6% about 15 minutes after the announcement. All three indices are nearing their highest levels for the year, amid hopes that the Fed can start cutting rates soon. Yields on government bonds fell, with the yield on the benchmark 10-year bond dropping to 4.09%, down from around 4.15% before the announcement. The yield on the benchmark 10-year bond had reached 5% in late October.
Market Expectations for Interest Rate Cuts
Market participants now expect a 60% chance that the Fed will cut interest rates at its March meeting, according to CME Group’s FedWatch tool. Data also indicates a 90% chance that the Fed will reduce interest rates by at least one percentage point by the end of 2024. Markets are reading cautious signals in the Fed’s statement, which added language acknowledging the economic slowdown and declining inflation.
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