Mariner S. in Washington, DC, US on Thursday, December 28, 2023. Eccles Federal Reserve Building.
Valerie Plesh | Bloomberg | getty images
uncertainty over policy path
According to minutes of the Federal Open Market Committee meeting in December, US Federal Reserve officials are largely in favor of cutting interest rates in 2024. However, there was an “unusually high level of uncertainty” over when or whether the cuts would actually occur this year. Still, markets are expecting a cut of six quarterly points.
shock to the markets
US markets fell on Wednesday, jittery over the minutes of the Fed meeting in December, as the 10-year US Treasury yield briefly topped the 4% mark. Pan-European Stocks 600 Day ended 0.86% lower. Maersk shares rose 3.83% on news that freight rates would rise due to route diversions, but the gain was not enough to lift the broader index.
soft landing on track
Richmond Federal Reserve Chairman Thomas Barkin expressed confidence that the US economy is on track for a soft landing – that is, a scenario where inflation falls to 2% or less without causing a contraction in the economy. However, Barkin sees four risks in a soft landing: growth could reverse; Unexpected shocks may occur; Inflation cannot fall below 2%; Higher demand may increase prices.
fear of war is spreading
Al-Arouri, Hamas’s deputy political chief, and six other members of the Palestinian militant group were killed on Tuesday. His home in Lebanon’s capital Beirut was reportedly targeted by a drone strike. Lebanon has claimed that Israel is responsible for the blast but Israel has not claimed responsibility. This incident has raised fears that the war in Gaza could spread beyond the Palestinian territories.
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The US Federal Reserve has not lost its role as one of the main driving forces for the markets.
Last December the Fed put its foot on the accelerator for stocks – perhaps inadvertently – when it announced its projection of three rate cuts for 2024. Yesterday, the minutes of that December meeting sent shares tumbling.
First the good news: The minutes revealed that Fed officials have concluded that a rate cut in 2024 is likely.
“Almost all participants indicated that, reflecting the improvement in their inflation outlook, their baseline projections implied that a lower target range for the federal funds rate would be appropriate through the end of 2024,” the document said.
But this is not a new thing. We already knew this from the dot plot released last month.
The part that spooked the markets: “Participants … reaffirmed that it would be appropriate to maintain a restrictive policy stance for some time until inflation clearly declines consistently toward the Committee’s objective “
Logically speaking, this is no news to the markets either. “Data-reliant” has been the Fed’s favorite phrase over the past six months. And it makes sense to say that cuts will happen only when inflation is low.
But the minutes also indicated an “unusually increased degree of uncertainty” about the path of monetary policy, suggesting that even three cuts have not been decided – although, to be fair, the dot plot is just one. It’s a projection, not a promise.
However, compare that sentiment to the six quarter-point cuts the market is expecting and it’s easy to see why the market reacted the way it did yesterday.
The S&P 500 fell 0.8%, the Dow Jones Industrial Average lost 0.76% and the Nasdaq Composite dropped 1.18%, its fourth consecutive day of decline. Meanwhile, the yield on 10-year Treasuries briefly surpassed the 4% mark as investors fretted over unexpectedly high long-term interest rates.
Jobs data will be out on Friday, and US consumer price index data will be out in exactly a week. Both numbers will not only determine the path of rates, but also where the market will go.
— CNBC’s Jeff Cox contributed to this report.