Wall Street widely expects the Federal Reserve to keep interest rates unchanged on Wednesday after the conclusion of its two-day policy meeting. However, the situation could become more complicated after the holidays.
Chief economist at LPL Financial, Jeffrey Roach, believes there will be no change in rates this year. He expects discussions about potential rate cuts to arise a few months into 2024. Roach emphasizes the importance of holiday sales in influencing the timing of rate cuts.
If holiday sales are satisfactory, Roach suggests that conversations about lower rates will likely take place in the second quarter. Keeping rates unchanged will maintain the Fed’s policy rate at a 22-year high, enabling the central bank to monitor the impact of previous rate hikes as it strives to reduce inflation to its 2% annual target.
Typically, stock prices tend to rise after the Fed cuts rates. However, this was not the case in March 2020 when emergency rate cuts were implemented due to the COVID crisis. Nevertheless, with the support of low rates and significant pandemic stimulus, the S&P 500 rebounded and reached record levels within six months.
It is important to note that the Fed’s “dot plot” in June indicated the possibility of multiple rate cuts next year, with rates eventually falling closer to 3%. However, these dot plots are not set in stone. They are released four times a year and serve as a guide to the central bankers’ economic outlook. The latest update of the dot plot is set to be released on Wednesday.
Here are the key predictions from Wall Street regarding the outlook for rates:
- Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, believes there will be one more rate hike this year. However, rates will remain elevated for a longer period of time. Rate cuts will only happen when economic data deteriorates, making it difficult to predict the timing.
- Saira Malike, chief investment officer at Nuveen, suggests that another rate increase is more likely to occur before any rate cuts due to inflation remaining above the Fed’s target. Rates are expected to remain elevated but stable in 2024.
- Dave Sekera, chief U.S. market strategist at Morningstar Research Services, argues that the market is not factoring in the possibility of Fed rate cuts until June 2024. However, Sekera anticipates rate cuts happening four to five times next year.
- The Goldman Sachs economics research team, led by Jan Hatzius, predicts that a fourth-quarter growth slowdown will convince more members of the Fed’s rate-setting committee to forgo a final rate hike in 2023. Their projection suggests a decline in rates from 2023-2026: 5.625%, 4.625%, 3.375%, 2.875%.
On Monday, stocks experienced marginal gains in anticipation of the Fed meeting. According to FactSet, the Dow Jones Industrial Average is up 4.5% for the year, the S&P 500 index is 16% higher, and the Nasdaq Composite Index has jumped 31% in 2023. The benchmark 10-year Treasury yield was at 4.318%, nearing its highest level in 16 years.
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