Steady Fed outlook boosts stock market's hopes for coveted 'soft
landing'
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[March 21, 2024] By
Lewis Krauskopf, Davide Barbuscia and David Randall
NEW YORK (Reuters) - A U.S. stock market perched at record highs
received an encouraging message from the Federal Reserve, after the
central bank stuck with its rate cut projections for 2024 despite
stronger-than-expected economic growth.
For weeks, evidence of robust growth and stubborn inflation had whittled
away at the market’s expectations for how deeply the U.S. central bank
will cut rates this year, even as stocks continued climbing.
On Wednesday, however, Fed Chairman Jerome Powell said the evidence of
economic strength had not changed the Fed's expectations that price
pressures will continue to ease. While the central bank substantially
upgraded its economic growth forecasts, it left unchanged its projection
for a total of 75 basis points in rate cuts for 2024, a reassuring
signal for investors who have piled into stocks on expectations of an
economic "soft landing," in which the Fed is able to tame inflation
without hurting growth.
“This is a Fed that wants to cut rates and believes inflation is coming
down and will continue to come down," said Jason Draho, head of asset
allocation Americas for UBS Global Wealth Management.
While not all investors were confident the Fed will be able to deliver
on its rate cut projections, Wednesday's market reaction was positive.
The S&P 500 ended up 0.9% and notched a new closing high, while the
Nasdaq Composite jumped 1.25%. The yield on the benchmark 10-year
Treasury, which moves inversely to prices, was last lower at about
4.28%.
The Fed late last year helped drive an equities rally when it signaled a
coming pivot to rate cuts, following a hiking cycle aimed at bringing
down inflation that had reached 40-year highs. The Fed last raised rates
in July 2023.
But investors this year have had to temper their expectations for
easing, reducing estimates for cuts from 150 basis points priced into
futures markets at the start of January to around 80 basis points.
While the Fed left its rate cut projections unchanged on Wednesday, it
did acknowledge the economy’s strength, raising its forecast to 2.1%
expansion in 2024, from an earlier forecast of 1.4%.
The projections align with those held by many investors: 62% of fund
managers in a recent survey by BofA Global Research said they expected
an economic soft landing.
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Traders react after the closing bell on the floor at the New York
Stock Exchange (NYSE) in New York City, U.S., March 20, 2024.
REUTERS/Brendan McDermid
"I think markets love that notion that (the Fed) is willing to let
inflation run a little bit hot, that they're willing to have growth
re-accelerate,” said Matthew Miskin, co-chief investment strategist
at John Hancock Investment Management.
Miskin is overweight U.S. large cap stocks relative to his
benchmark. Draho, of UBS, has a larger-than-usual position in small
caps relative to large caps in his portfolios in part because he
sees the U.S. economy closer to the start of a business cycle than
toward the end, which should benefit companies with more domestic
exposure. The small-cap-focused Russell 2000 index is up 2.4%
year-to-date.
Still, some investors were doubtful the Fed would be able to deliver
75 basis points of easing shown in its "dot plot," which shows the
rates outlook of each of the Fed's 19 policymakers, given the
underlying strength of the economy and the stickiness of inflation,
which remains above the Fed’s 2% target.
Indeed, investors last year had expected the Fed to begin cutting
rates in March, but views have shifted, with futures markets now
priced for a June cut.
“I am skeptical,” said Eric Vanraes, head of fixed income at Eric
Sturdza investments in Geneva, Switzerland. The Fed’s views of
growth are “not really consistent with three rate cuts.”
Expectations of a tougher slog were reflected in the Fed’s
projections, which suggest policymakers may be more inclined to keep
rates higher for longer to make sure inflation does not stall out
above their goal, or flare up again.
Nine of the Fed's 19 policymakers see three quarter-point rate cuts
this year, and nine see two or less. Only one penciled in more cuts
than the median, compared with five in December.
Jon Mondillo, head of North American fixed income at abrdn, said he
was looking to add duration, a measure of a bond portfolio's
sensitivity to interest rates, but wanted to wait for more
confirmation that the Fed is on the path to easing.
“Let’s not forget that when we look at the dot plot it would have
taken only one more member to shift to two 25-basis-point cuts,” he
said.
(Reporting by Lewis Krauskopf, Davide Barbuscia and David Randall;
additional reporting by Lisa Mattackal in Bengaluru; Editing by Ira
Iosebashvili and Leslie Adler)
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