The markets fell on Wednesday, dropping sharply within the afternoon following the Federal Reserve’s decision to carry rates of interest at their current levels.
The S&P 500 dropped 79 points or 1.6% on Wednesday to shut at 4,845, while the Nasdaq Composite fell 346 points or 2.2% to fifteen,614. As well as, the Dow Jones Industrial Average tumbled 317 points or 0.8% to 38,150.
There had been some perhaps irrational exuberance that the Fed might start cutting rates as early as March. Nevertheless, the central bank threw cold water on that, which can have accelerated the decline on Wednesday afternoon.
A March rate cut is unlikely
The Fed held the federal funds rate at 5.25% to five.5% for the fourth straight meeting after last raising it in July. It was not unexpected, however the markets appear to have interpreted the Fed’s remarks and statements as more hawkish in tone.
“The economic outlook is uncertain, and the Committee stays highly attentive to inflation risks,” the Fed said in its statement. “The Committee doesn’t expect it’ll be appropriate to scale back the goal range until it has gained greater confidence that inflation is moving sustainably toward 2%. As well as, the Committee will proceed reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2% objective.”
In December, inflation actually rose to three.4% from 3.1% in November, in order that likely influenced the Fed’s perceived hawkish tone. The economy also grew at a faster-than-expected clip within the fourth quarter, with the gross domestic product (GDP) at 3.3%, ahead of the projected 2.2% growth rate.
Fed Chair Jerome Powell was more pointed in his language within the press conference that followed the central bank’s statement, declaring, “Inflation remains to be too high, ongoing progress in bringing it down isn’t assured, and the trail forward is uncertain.”
The excellent news is that Powell said that rates are likely at their “peak for this tightening cycle,” adding that “if the economy evolves broadly as expected, it’ll likely be appropriate to start dialing back policy restraint in some unspecified time in the future this 12 months.”
Nevertheless, that probably won’t be at the subsequent meeting in March.
“Based on the meeting today, I might let you know that I don’t think it’s likely that the committee will reach a level of confidence by the point of the March meeting to discover March is the time to try this [cut rates], but that’s to be seen,” Powell said on the press conference.
He added that March is “probably not the more than likely case or what we might call the bottom case.”
Irrational expectations?
Plainly the market overreacted to the Fed’s decision and comments on Wednesday, as a rate cut in March was probably not within the cards anyway. The Fed indicated as much in its summary of projections, or dot plot, at its last meeting in December, because the consensus called for around three rate cuts in 2024. It was unlikely that those cuts would start as early as March.
On Thursday morning, all three major markets opened higher, which probably suggests a collective acknowledgment that things went too far the opposite way on Wednesday.
Thursday needs to be one other big day for the markets, particularly after hours, as three of the Magnificent 7 stocks — Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Meta Platforms (NASDAQ:META) — are all set to report their latest earnings results after the market closes.