Stocks rally and bond yields fall as Fed signals rate cuts in 2024


Investors cheered the Federal Reserve's forecast Wednesday that it would begin lowering interest rates next year. The news caused stock prices to rise sharply and Treasury yields to plummet.

The S&P 500 rose 1.4 percent after the Federal Reserve released its projections for where the economy and interest rates would be by the end of 2024. The rally left it less than 2 percent below the peak recorded at early January 2022, just before Fear of higher rates sent the stock market tumbling. The Dow Jones Industrial Average, considered a barometer of the economy because it includes large manufacturing companies that tend to be more sensitive to the business cycle, also rose 1.4 percent to a new high.

In a positive sign for the broader market, the Russell 2000 index of smaller companies, which also tends to follow the ebb and flow of the national economy, rose 3.5 percent.

“The market loves it, that's for sure,” Lauren Goodwin, an economist at New York Life Investments, said after the Federal Reserve's economic projections were released.

The Federal Reserve's rapid rate increases since March 2022 have sent shock waves through financial markets, raising borrowing costs on everything from mortgages to government debt and weighing on the stock market.

On Wednesday, the Federal Reserve appeared to confirm something investors have been expecting for a couple of months: its campaign to raise interest rates has come to an end. In recent months, a sustained slowdown in inflation has become more evident, bringing it closer to the central bank's goal. At the same time, the continued resilience of the broader economy has meant that investors have not had to worry as much about the downsides of high borrowing costs.

Federal Reserve officials forecast about three rate cuts of a quarter-point each next year, more than they predicted when the Fed met in September.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, moved sharply in response to the Federal Reserve's projections, falling more than a quarter of a percentage point to around 4.4 percent, its biggest one-day decline since the banking crisis. in March.

Analysts are now divided on where the market goes from here. Some warn that with growth slowing and inflation yet to fully slow to the Federal Reserve's target of 2 percent, rate cuts may be necessary to shore up the economy, rather than simply adjust to slower inflation.

“My expectation is that we will see growth continue to slow, and if the Fed is cutting, it will do so much and quickly,” Ms. Goodwin said.

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