Lucas Jackson/Reuters
- The Fed's nod towards interest rate cuts sparked a sea change on Wall Street last week.
- The question about rate cuts from the Fed changed to a matter of when in 2024, not if.
- Wall Street forecasters are starting to pencil-in more easing and expect it to happen earlier in the year.
The Federal Reserve's nod toward a coming dovish pivot last Wednesday sparked a sea change on Wall Street, as investors panic-bought stocks and forecasters penciled-in just how many interest rate cuts could be on the table for 2024.
Fed Chairman Jerome Powell kept interest rates steady at the FOMC meeting this week, making it the third policy meeting that saw interest rates unchanged. And while Powell acknowledged that any reversal in current inflation trends could spark the Fed to resume its interest rate cuts, more of the talk was focused on rate cuts.
"The December FOMC was clearly dovish, leading markets pricing about 90% chance of a Fed rate cut by March," Bank of America said in a Thursday note.
The median projection among Fed members as to where interest rates will be at the end of 2024 fell to 4.6% on Wednesday from 5.1% in September. That means the Fed itself expects to cut interest rates by 25 basis points at least three times in 2024.
For the most part, the market isn't buying it, and thinks there's more loosening in store than what the central bank is suggesting. Current consensus projects at least six 25 basis point interest rate hikes next year, according to the CME Fed Watch Tool. Prior to Wednesday's Fed meeting, the market was expecting five interest rate cuts in 2024.
Consensus on Wall Street is also beginning to shift, mainly because the Fed has a tendency to be behind the curve when it comes to setting interest rate policy, as officials heavily rely on lagging economic data to inform their rate decisions.
When inflation was surging in 2020 and 2021, the Fed said it "wasn't even thinking about thinking about raising interest rates."
It could be the same story on the flip side, as inflation falls faster than expected and real rates remain too restrictive. In November, Powell said the Fed was "not talking about rate cuts." But that thinking, as markets have seen in the past, could change on a dime.
Here's what Wall Street is saying about the Fed's dovish pivot and what that means for interest rates in 2024.
Goldman Sachs: "We now expect the FOMC to cut earlier and faster."
Goldman Sachs said that perhaps the biggest news this week wasn't what the Fed said, but rather the sharp drop in inflation, with downward revisions to prior months data of core PCE showing that it was up 3.1% year-over-year in November.
"By some measures, the trend [in inflation] is already at or near 2%," Goldman Sachs' top economist Jan Hatzius said. That would be right around the Fed's long-term 2% inflation target, and according to Hatzius, that means interest rate cuts will be swift.
"In light of the faster return to target, we now expect the FOMC to cut earlier and faster. We now forecast three consecutive 25 basis point cuts in March, May, and June to reset the policy rate from a level that the FOMC will likely soon come to see as far offside, followed by quarterly cuts to a terminal rate of 3.25% to 3.50%, 25 basis points lower than we previously expected," Hatzius said in a recent note.
JPMorgan: "We now look for a first cut in June (previously July)."
JPMorgan economist Michael Feroli noted that Powell didn't push back against the Fed's dovish tilt during his press conference, which was notable. That, in combination with the Fed's dot plot and recent inflation readings, gives Feroli confidence that the Fed will cut rates sooner than it originally expected.
"With the Committee signaling that further inflation progress will be sufficient for easier policy, we now look for a first cut in June (previously July) and for a target ranger 125 basis points lower by year-end," Feroli said in a recent note.
Macquarie: "Our policy view is unchanged."
Economists at Macquarie kept their projections unchanged following the Fed's FOMC meeting this week, but that's probably because they already have one of the most aggressive rate cut projections on Wall Street.
The firm expects the Fed to cut interest rates by 225 basis points next year, translating to nine 25 basis point rate cuts.
"Our policy view is unchanged. We believe the rate hike cycle is complete, but that rate cuts are unlikely until 2Q24. We see significant easing in 2H, however, and overall cuts of 225 bps in 2024 driven by a continued moderation in core inflation and an undesirable rise in unemployment," Macquarie said in a recent note.