Stocks rose and bond yields fell after the Federal Reserve signaled stronger chances of interest-rate cuts next year, with traders now focused on Jerome Powell’s remarks for more clues on the central bank’s next steps.
The S&P 500 extended gains to 1%. Two-year yields dropped 28 basis points to 4.45%. The dollar fell. Swap contracts repriced to levels consistent with 130 basis points of easing over the next 12 months.
In what was arguably the most-important Fed decision of 2023, officials said they expect to lower rates by 75 basis points next year—a sharper pace of cuts than indicated in September’s projections. Powell said inflation easing without unemployment spike is good news, while reiterating that policy has moved well into restrictive territory. The Fed chair continued to say that officials are proceeding carefully as inflation may have eased, but it’s too high.
Comments:
- Jon Maier, chief investment officer at Global X: “The market is celebrating that the Fed dots moved closer to the market’s. This isn’t just a mere decision to maintain current rates; it’s a commendation for an economy that appears to be aligning with the Fed’s long-term objectives.”
- Diane Swonk, chief economist at KPMG: “They signed off on this statement and they signed off on this forecast and this is about as dovish as we could have expected. This is more than I expected in terms of dovishness.”
- Krishna Guha, vice chairman at Evercore: “The FOMC statement and new Summary of Economic Projections are dovish and risk-on with new language in the statement assessing that ‘inflation has eased over the past year’ and a three cut median projection for next year.”
- Callie Cox at eToro: “The Fed believes they have the soft landing in the bag. Clearly, markets believe them now. Fed members now see a few rate cuts in 2024, and these seem to be celebratory rate cuts too. Nobody has a crystal ball, so it’s important to stay nimble and remember that rates could stay high for a while. But the Fed’s stance could keep the rate cut trade rolling through the end of the year.”
- Gina Bolvin, president of Bolvin Wealth Management Group: “The Fed has given the market an early holiday gift today when , finally, for the first time, they have commented positively about inflation. I’d say we’ve seen a pivot as they acknowledged inflation is falling. It appears that the Fed is moving in the markets direction, rather than the market moving towards the Fed. The Santa Claus rally may continue.”
- Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley: “Yes, inflation has been moving in the right direction, but the Fed maintained its hawkish tone in today’s statement, even though they anticipate cutting rates three times next year. Investors should expect more of the same in the New Year. Having waited this long for their policies to begin slowing the economy and cooling inflation, the Fed isn’t going to throw caution to the wind just because the finish line finally appears to be in sight.”
Ahead of the decision, data showed producer-price gains slowed as energy costs fell. Consumer prices Tuesday underscored a drop in the annual rate of inflation—even as monthly gains picked up. Taken together, the numbers reinforce the notion that inflation is trending back toward the Fed’s target.
Earlier Wednesday, Treasury Secretary Janet Yellen said it would make sense for the Fed to consider lowering interest rates as inflation eases to keep the economy on an even keel.
“As inflation moves down, in a way, it’s natural that interest rates come down somewhat because real interest rates would otherwise increase, which would tend to tighten financial conditions,” Yellen said Wednesday in an interview on CNBC.
Corporate Highlights:
• Apple Inc. is set to be hit by a ban on its App Store rules that govern music-streaming rivals and a potential hefty fine in the European Union’s latest attempt to limit the power of Big Tech.
• Tesla Inc. will fix more than 2 million vehicles—its biggest recall ever—after the top U.S. auto-safety regulator determined its driver-assistance system Autopilot doesn’t do enough to guard against misuse.
• SpaceX will sell insider shares at $97 apiece in a tender offer, a price increase that boosts the value of Elon Musk’s space and satellite company closer to $180 billion, according to people familiar with the matter.
• Pfizer Inc.’s disappointing forecast for next year showed the purchase of a leading cancer drugmaker isn’t enough to fill the ever-growing hole from its flailing Covid franchise.
• Southwest Airlines Co. raised its outlook for fourth-quarter revenue, buoyed by higher travel demand and ticket prices than it had expected over the year-end holidays.