The stock market appears to be enjoying an early Christmas, and a Santa Claus rally may be just around the corner. The Federal Reserve held the fed funds rate unchanged for the third time in December 2023. The rate range stands at 5.25%-5.5% having risen from near zero about 20 months back. The markets got a hint of things to come in 2024 after the Fed projected three-quarter percentage point cuts in 2024.
The S&P 500 is up 1.37% following the decision to 4,707, a year-to-date high, up over 30% from its October low, and is within 2% of its all-time high reached in January 2022. Gina Bolvin, President of Bolvin Wealth Management Group says, “The Fed has given the market
“An early Christmas gift awaited markets as the US Federal Reserve struck the right chord with risk-driven investors following a seemingly dovish stance at its last monetary policy meeting in 2023. We believe that the Fed has now acknowledged that previous rate hikes are working into the economy
Did Powell sound dovish during the press conference? Well, his remarks along with the dot plot predictions would not bode well for bears over the next few weeks. Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance says, ” For those expecting a Hawkish pause, they didn’t get that at all. The Fed left rates unchanged – as was widely anticipated – but they left a median of 3 rate cuts next year in their summary of economic projections, which is exceedingly dovish.
Stocks and bonds took off higher after the Fed statement was released at 2 pm and soon after Powell began speaking, prices moved even higher.
The Santa Claus rally has come early this year or perhaps is just getting started. The bears are running for cover and may have to go into hibernation, given the robust GDP growth, strong consumer spending, low unemployment, and a Fed that is talking about cuts, let alone staying on hold.”
The Summary of Economic Projections showed that FOMC expects the funds rate to be at 4.75% by the end of 2024, below their previous projections of 5.25%, as the cooler-than-expected inflation reports released in the previous months drove Fed policymakers to revise PCE inflation forecasts downwards, while unemployment and GDP gauges were loosely unchanged.
The Fed Dot Plot holds the key for the market to make the trading moves. Bill Adams, Chief Economist for Comerica Bank says, “The FOMC changed their policy statement to acknowledge slower economic growth since the beginning of the fourth quarter, as well as the decline in inflation over the last year. FOMC members revised the Dot Plot showing that the median FOMC member expects three quarters of a percent in rate cuts to be appropriate in 2024, versus half a percent in cuts anticipated by the median in the September Dot Plot.”
The next step is a rate cut, and markets are now anticipating a faster and harsher easing cycle as a result of Powell’s statements about decreasing rates before they hit their inflation target.
Ruslan Lienkha, chief of markets, YouHodler says, “Just a few months ago the Fed was warning us about one more possible hike before the New Year, but the inflation trajectory has allowed the central bank to be softer. So now, the rhetoric has changed slightly, and a rate cut is expected as the next step – the only question is when.”
The Federal Reserve’s move to decrease interest rates next year will result in moderate gains for US stock and bond prices, albeit the easing may not be as forceful as markets now assume.
Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth says, “While we are welcoming of the most dovish Fed presser we have seen in quite some time, I did not foresee this happening today. The tone today was almost as though they were expecting the perfect landing, well beyond expectations of a soft landing. Equity markets are overjoyed but I cannot help but wonder and hope that Chairman Powell’s tenure turns out better than Arthurs Burns’ did.”