Doves fly at the Fed...and the market loves it
Wall Street was thrilled to see that the Federal Reserve is clearly getting ready for rate cuts next year.
Jerome Powell didn’t leave a lump of coal in the stockings of investors. The Federal Reserve left interest rates alone…as expected. But more importantly, the Fed’s new economic projections showed that central bankers think inflation pressures will continue to cool and that rate cuts are likely next year. Powell admitted as much during his press conference Wednesday, saying that Fed policymakers are starting to think about when it will be appropriate to begin lowering rates.
The Dow surged more than 400 points to a new record high thanks to the Fed’s/Powell’s dovishness. The S&P 500 and Nasdaq also popped in late afternoon trading, with each hitting fresh 52-week highs.
Clearly, investors are betting that the Fed is no longer going to be worried about high inflation. That’s an all-clear sign for stocks because rates are likely to fall at some point in 2024. In fact, the bond market is already starting to do the Fed’s job for it. The 10-year Treasury yield, a benchmark rate that influences borrowing costs for many different types of consumer and business loans, tumbled to just above 4% Wednesday afternoon. The 10-year was hovering a little below 5% as recently as late October.
As long as Powell keeps sounding more like a dove, stocks could keep climbing for the foreseeable future. But investors will have to eventually start wondering if the Fed went too far with its rate hikes in the first place. How much will the economy (and perhaps corporate earnings growth) slow in 2024? Did the Fed really engineer a soft landing or will there be a recession next year…and if there is a downturn, how mild will it be? The market arguably can withstand a modest/moderate economic pullback. But anything that starts looking like 2008 would obviously be problematic.
For now at least, it’s a risk-on environment though. Traders are cheering the dip in bond yields, which could lead to a further drop in mortgage rates and possibly create another mad dash for housing. It is no coincidence that among the many stocks hitting new all-time peaks Wednesday, several of them were homebuilders. D.R. Horton, Pulte, Lennar and Toll Brothers are now at record highs.
So it’s happy holidays, Wall Street. Looks like the proverbial punch bowl (eggnog for this time of year?) is still spiked. Visions of future Fed rate cuts are dancing in traders’ heads.