U.S. markets surge as Fed signals rate cuts on the way
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Stocks jumped as the Federal Reserve hinted that significant rate cuts are on the way next year.
Why it matters: Hopes that rate hikes are finished have fueled this year's 22% rise in the S&P 500. The official statement from the U.S. central bank at 2pm ET on Wednesday — and subsequent remarks by chair Jerome Powell — largely confirmed that view.
- The Fed left rates untouched and tweaked its policy statement to suggest that additional rate hikes are no longer likely.
Zoom in: In one passage of the statement, the Fed notes the factors the committee will use to determine "the extent of any additional policy firming."
- That is a significant change from past language about determining "the extent of additional policy firming."
- In other words, the appearance of "any" suggests further rate hikes, which before were a forgone conclusion, are now a mere possibility.
What they're saying: "We added the word 'any' as an acknowledgment that we believe that we are likely at, or near, the peak rate for this cycle," Powell told reporters.
- Most top Fed officials now foresee cutting rates three or more times in 2024. The median projection is that in December of next year, the Fed's target rate will be 4.6%, 0.75 percentage points lower than now.
The impact: The S&P jumped 1.4%, its best day in almost a month.
- The yield on the U.S. 10-year Treasury note, one of the most widely followed measures of interest rates, plunged below 4% Thursday morning.
Flashback: Less than two months ago, the yield on the T-note was at nearly 5% — its highest level in 16 years.
- Then came a string of nearly note-perfect data releases — softer job readings, slower inflation, and rising productivity — which helped convince investors that the Fed has won the war on inflation (and therefore rate cuts could be expected early next year).
The bottom line: Wednesday's announcement suggests the Fed agrees. That's why the S&P 500 is less than 2% from a new all-time high.
