Fed Chair Powell says Fed is 'not likely' to hike rates further

The Dow jumped 512 points, or 1.4%, to top 37,000 and surpass its prior peak of 36,799.65 set at the start of last year.

Other, more widely followed indexes of US stocks also leapt. The S&P 500 rose 1.4% and is within 2% of its own record. The Nasdaq composite also gained 1.4%.

All the excitement came as the Federal Reserve held its main interest rate steady at a range of 5.25% to 5.50%, as was widely expected. It’s hiked that rate up from virtually zero early last year in hopes of slowing the economy and hurting investment prices by exactly the right amount: enough to snuff out high inflation but not so much that it causes a painful recession.

With inflation down sharply from its peak two summers ago and the economy still solid despite high-interest rates, hopes have been rising that the Fed can pull off that perfect landing. And in a press conference Wednesday, Fed Chair Jerome Powell said its main interest rate is likely already at or near its peak.

While acknowledging that inflation is still too high and the battle against it is not over, Powell said Fed officials don’t want to wait too long before cutting the federal funds rate, which is at its highest level since 2001.

“We’re aware of the risk that we would hang on too long” before cutting rates, he said. “We know that’s a risk, and we’re very focused on not making that mistake.”

That’s why Wall Street’s focus was squarely on the projections that the Fed released showing where policymakers see the federal funds rate ending in 2024. They showed the median official expects it to be at roughly 4.6%.

While that implies a less steep cut than many traders on Wall Street are expecting, it’s more than the median Fed official was predicting three months ago.

Following the release of the projections, traders on Wall Street upped their bets for rate cuts in 2024. A majority of bets now expect the federal funds rate to end next year at a range of 3.75% to 4% or lower, according to data from CME Group.

Treasury yields tumbled in the bond market on such bets. The yield on the 10-year Treasury dropped to 4.01% from 4.21% late Tuesday. It was above 5% in October, at its highest level since 2007. The two-year yield, which moves more on expectations for the Fed, sank to 4.43% from 4.73%.

They both had already been down earlier in the morning, after a report showed prices at the wholesale level were just 0.9% higher in November than a year earlier. That was softer than economists expected.

Such drops in yields and rallies for stocks, though, maybe threatening to undo the very future investors are banking on, according to more cautious investors.

Lower yields in the bond market make it easier for U.S. households to get a cheaper mortgage and for U.S. businesses to borrow money to expand. Rising stock prices, meanwhile, give stock-owning households more wealth. All that could put upward pressure on inflation, which could eventually force the Fed to actually hike rates again, warned Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

He also said it’s unlikely the Fed will cut rates as many times as traders are expecting in 2024 unless there’s a recession. He is expecting the US economy to fall into a moderate recession early next year.

“We think it’s going to take a recession to cure that last leg of inflation” and ensure it falls all the way down to the Fed’s 2% target, Samana said.

AP

Photo by Reuters