The U.S. stock market, currently at record highs, received a positive signal from the Federal Reserve, which maintained its rate cut projections for 2024 despite witnessing stronger-than-expected economic growth. This decision comes as a relief to investors who have been adjusting their expectations for rate cuts amidst signs of robust growth and persistent inflation.
Fed Chairman Jerome Powell reassured investors by stating that the recent economic strength does not alter the Fed's outlook for easing inflation pressures. Despite upgrading its economic growth forecast for 2024 to 2.1% from 1.4%, the Fed's projection for 75 basis points in rate cuts remains unchanged. This stance supports the investor sentiment of a potential economic "soft landing," where inflation is controlled without hampering growth.
While some investors remain skeptical about the Fed's ability to meet its rate cut projections, the market's reaction to Wednesday's announcement was overwhelmingly positive. The S&P 500 surged by 0.9%, reaching a new closing high, and the Nasdaq Composite increased by 1.25%. Additionally, the yield on the 10-year Treasury note dropped to about 4.28%, indicating a decrease in interest rates.
Last year, the Fed initiated an equity rally by signaling a shift towards rate cuts after a period of rate hikes aimed at combating inflation, which had hit 40-year highs. However, investor expectations for rate cuts have been moderated from 150 basis points at the beginning of January to approximately 80 basis points.
Despite leaving its rate cut projections unchanged, the Fed acknowledged the economy's resilience by raising its growth forecast for 2024. This outlook aligns with the expectations of many investors, with 62% of fund managers in a BofA Global Research survey anticipating an economic soft landing.
Experts like Matthew Miskin from John Hancock Investment Management and Jason Draho from UBS Global Wealth Management express optimism about the Fed's approach, favoring U.S. large cap and small cap stocks, respectively. However, some investors, like Eric Vanraes from Eric Sturdza Investments, remain skeptical about the feasibility of the Fed's projected rate cuts given the current economic strength and inflation levels.
Overall, the Fed's projections indicate a cautious approach towards managing inflation while supporting economic growth, leaving investors watching closely for any shifts in policy.
