The Fed delivers some holiday cheer to the markets

DEWITT, Mich. - Dec. 19, 2023 - PRLog -- Key takeaways:

• Even after six straight weeks of gains, markets remained in holiday mode last week, with stocks marking their seventh week of positive returns. The S&P 500 is now up nearly 23% for the year, with much of these returns still attributed to a handful of mega-cap technology stocks.¹
• However, perhaps what differentiated the rally over the past month is that some broadening of market leadership (finally) has started to emerge. In fact, while the S&P 500 was up about 5% over the last month, interest-rate-sensitive parts of the market performed better. Small-cap stocks rose over 11%, the S&P 500 real estate sector was up over 12%, and the high-quality dividend stocks were up over 6%.

The Fed plays Santa Claus for the markets

Last week's December FOMC meeting proved to be a pivotal one for markets. We highlight three key takeaways from this last Fed meeting of 2023 that the markets cheered:

1. The "dot plot" pointed to three rate cuts in 2024: While there was uncertainty ahead of the meeting around what the Fed's new set of economic projections would reveal, particularly around the path of interest rates, the Fed did not disappoint the markets. Not only did the new "dot plot" indicate that the Fed would likely not raise rates again, but it also pointed to three potential rate cuts next year, more than the two cuts that the September estimates had indicated. The estimates also indicate seven cuts over the next two years, bringing the fed funds rate to 2.9% by 2026, well below the current 5.25% - 5.5%.
2. The Fed endorses a form of a soft landing in the economy with a steady unemployment rate. Despite forecasting lower economic growth and inflation next year, the Fed left its forecast for the unemployment rate unchanged at 4.1%, and it expects it to remain steady at this rate through 2026. This is also just modestly higher than its expectation of a 3.8% unemployment rate in 2023. The Fed sees cooler economic growth and moderating inflation without a meaningful decline in joblessness – this is a soft landing for the economy, as recessions are typically accompanied by a sharper rise in unemployment.
3. Fed Chair Jerome Powell reaffirmed the notion that inflation doesn't have to reach 2.0% for the Fed to start cutting rates. During the press conference, Chair Powell noted that "you'd want to be reducing restriction on the economy well before 2% so you don't overshoot… it takes a while for policy to get into the economy, affect economic activity, and affect inflation."

Sources: 1. FactSet.