market There has been a sense of celebration in recent weeks as signs pile up that the Federal Reserve may be on its way to raising interest rates. Inflation has fallen dramatically since the Fed began policy. Borrowing costs were raised last March in an effort to slow the economy amidst the highest level of inflation in decades. Fed policymakers are now anticipating up to three rate cuts in 2024, the central bank said Wednesday, but Chairman Jerome H. Powell made clear that any rate cuts would depend on economic conditions.
“We’re going to look at the totality of the data,” he said at a press conference Wednesday. “Growth is one thing. So is inflation. So is labor market data. … Let’s look at the totals. We decide on future policy changes. … All of them. We will consider it.”
The last rate hike was in July, and higher interest rates have cooled the economy in a way that has encouraged policymakers. Inflation has fallen dramatically, from a high of 9.1% last summer to 3.1% in November. Wage growth has slowed, consumers are spending less, and the job market, while still strong, is slowing to a more reasonable pace. Economists appear increasingly confident that the Fed can achieve a “soft landing” by reining in inflation without causing a spike in unemployment.
“A soft landing is in the bag,” said Claudia Sahm, founder of Sahm Consulting and former Fed economist. She said: “Inflation has been falling in recent months, raising the possibility of a recession. Barring some other catastrophe, the economy has achieved the impossible.”
Many on Wall Street now believe that the Fed is done raising interest rates, and there are growing expectations in the market that the Fed could cut rates as early as next spring or summer.
“Recent history suggests a rate cut will occur in March 2024,” Joseph LaVogna, chief economist at SMBC Nikko Securities, said in a note Monday. “The futures market agrees,” he added, adding that investors expect there’s a 75% chance the Fed will cut rates in the first three months of next year.
But Fed officials have been cautious about their next move, showing little appetite for any immediate policy change. In remarks at Spelman College this month, Powell said the central bank was still treading “cautiously.”
“It would be too early to conclude with any confidence that we have achieved a sufficiently restrictive stance, and it would be premature to speculate on when policy will be eased,” Powell said. “We are prepared to further strengthen our policies if necessary,” he said.
Of the 30 companies included in the Dow Jones, Walgreens was the biggest gainer on Wednesday, rising 7.4%. The S&P 500 has gained 1.37%, and is up 22% since the beginning of the year. The Nasdaq closed up 1.38%.
The U.S. economy has proven to be exceptionally resilient this year, continuing to grow quarter after quarter despite rapid interest rate hikes. And while there are signs that Americans are starting to pull back (retail sales fell slightly in October), many still have excess pandemic-era savings that have allowed them to continue spending. .
Still, Americans are clearly pessimistic about their finances. The housing market is stagnant, with mortgage interest rates above 7%, deterring many first-time home buyers and preventing them from expanding their families.Consumer sentiment is sluggish 4 consecutive months. Also, according to a Washington Post ABC News poll, approval ratings for President Biden’s economic response are at their lowest since he took office.
“Consumers have been negatively impacted by interest rates, and that impact continues,” said Torsten Slok, chief economist at Apollo Global Management. “As interest rates rise, more households are starting to fall behind on their credit card and car loan payments. Households with the most debt are the first to be affected.”
The backlash from the economic slowdown is hurting Americans in a variety of ways. Some people are still spending a lot of money thanks to a surge in household assets and savings during the pandemic, while others, even those on lower income levels, are having to take on additional debt to cover basic necessities. There are some too. Overall job growth has slowed from average over the past year. 240,000 The number of new jobs added each month will reach 199,000 in November. Annual wage growth in November was 4%, the lowest in more than two years.
Consumer spending has also slowed in recent months as Americans stopped buying cars and electronics and cut back on movies and amusement parks. But so far, these changes have been gradual enough to curb inflation without causing the economy to collapse.
“This is exactly what the Fed is trying to accomplish,” Apollo’s Throck said. “The reason we raise prices is so you and I buy fewer washers, dryers, cars, and iPhones.The question is: Will this be a sharp slowdown or a gradual slowdown? I don’t think anyone knows at this point.”
Still, recent signs of slowing are enough to buoy the market. The S&P 500 and Nasdaq both soared to 2023 highs on Monday and appear poised to hit new all-time highs this week.
The recent rally extends beyond the stock market. The price of gold has risen 9% since early October, and the price of Bitcoin, the leading cryptocurrency, has risen about 50% over the same period to more than $41,000.
Jonathan Rose, a financial consultant and co-founder of Genesis Gold Group, said gold is not typically a popular investment when the stock market is strong, but the recent rise in gold’s price has given consumers a sense of urgency. It is said that this speaks to his anxiety.
“I think people are confused about the economy,” Rose said. “When people are in turmoil, many take a more defensive approach, such as buying assets such as gold and silver to balance the risk and unknown.”
Still, some say it’s too early to declare victory. Inflation remains far from the Fed’s 2% target, and economists say the last step is likely to be the toughest and riskiest. It can take weeks or months for the Fed’s policies to be reflected in the economy, meaning there’s still a chance the economy will weaken next year.
Jamie Dimon, CEO of JPMorgan Chase & Co., the nation’s largest bank, recently warned Wall Street that it needs to prepare for a recession because “there’s a lot of dangerous and inflationary things out there.” Other wildcards still remain. Millions of households began paying off student loans in October, and many more are taking on additional credit card debt to make ends meet.
“It’s still too early to say we’re out of the woods, but things are moving in the right direction,” said Bernard Jarosz, chief U.S. economist at Oxford Economics. “The scenario we had hoped for, with no recession and mild deflation, is becoming a reality.”
Rachel Siegel contributed to this report.