On Wednesday, as investors analysed the Federal Reserve’s last interest rate decision of the year, US markets surged higher and reached fresh all-time highs for 2023.
Following the ruling, the tech-heavy Nasdaq Composite (^IXIC), the Dow Jones Industrial Average (^DJI), and the benchmark S&P 500 (^GSPC) all saw increases of around 1.3%. The Dow increased by about 500 points, breaking beyond 37,000 and establishing an all-time record closing.
On Wednesday, the Federal Reserve maintained its benchmark interest rate at its highest level in 22 years, between 5.25% to 5.50%. Investors have been expecting this move for a while.
The central bank’s Summary of Economic estimates, which contains estimates for interest rates in the upcoming year, was also released by the Fed. The Fed has revised its forecast for 2024 rate decreases to 75 basis points, which is one more than it had predicted in September.
Following the Federal Reserve’s most recent policy announcement, which contained expectations for one more interest rate decrease in 2024 than first anticipated, stocks surged.
Following the ruling, the tech-heavy Nasdaq Composite (^IXIC), the Dow Jones Industrial Average (^DJI), and the benchmark S&P 500 (^GSPC) all saw increases of around 1.3%. The Dow increased by about 500 points, breaking beyond 37,000 and establishing an all-time record closing.
The Dow has increased by more than 8% in the past month, after trailing for the most of 2023.
Treasury yields decreased on Wednesday in the meanwhile. The yield on the 10-year Treasury note (^TNX) dropped 17 basis points to hover around 4%, the lowest since August.
June marked the formal start of a bull market for stocks as they rose sharply on the excitement around artificial intelligence.
However, many had questioned the viability of the market rise because the Magnificent Seven tech firms had fueled a big portion of the gain.
Interest rate-sensitive industries are currently driving market movement as the Fed projects more interest rate reduction in 2024 than was previously anticipated. Financials and other sectors that had not participated in the rise are now up around 10% in the past month.
According to market guru Ed Yardeni, investors should see this as a positive indication that the bull market is still strong.
According to Yardeni, “what we’re seeing right now is a legitimate bull market,” as said on Yahoo Finance Live. “It’s broadening.”
More robust economic growth than many anticipated has shaped the 2023 economic narrative.
Fed Chair Jerome Powell has occasionally mentioned that if above-trend growth pushes inflation higher, the Fed may decide to raise interest rates even further.
However, Powell stated on Wednesday that robust growth is “not itself a problem” in response to a particular question concerning the economy potentially surprise to the upside in 2024. It only presents a problem, he said, if “it makes it difficult to achieve our goals.”
Nevertheless, he clarified that strong growth may maintain a vigorous labour market and drive prices higher, making it more difficult to reach the Fed’s 2% inflation target. This might imply that rates continue to rise longer.
Interest rates are predicted to decrease to 4.6% in the upcoming year, according to central bank officials.
The Fed published updated economic forecasts in its Summary of Economic Projections (SEP), which includes its “dot plot,” which illustrates policymakers’ expectations for potential future interest rate movements, in addition to its policy announcement, which left rates unchanged in a range of 5.25%–5.5%.
The Federal Reserve reduced its September forecast of 5.1% to 4.6% for the fed funds rate peak in 2024. This implies that next year’s rate cuts by the Fed will be of 0.75%.
Over the past year, the Fed has changed rates in increments of 25 basis points, signalling that it currently anticipates cutting interest rates three times in 2024.
Only two officials envisage no rate decreases next year, while seventeen anticipate one, with five predicting a fall of more than 0.75%. In 2024, no official anticipates a little increase in rates. In contrast to September’s estimates, this month’s forecasts for rates next year were likewise less widely dispersed.
In order to align with the Fed’s hold, the prediction for 2023 was likewise lowered. Officials had predicted one more rate increase this year as late as September. Officials predicted that interest rates will peak in 2023 at 5.1% at the end of 2022.