Premarket gains in stocks were erased on Friday as comments from John Williams, president of the New York Fed, tempered expectations of an imminent interest rate cut. Williams stated in a CNBC interview that rate cuts are not currently being discussed and it would be premature to consider a reduction by March.
The stock market has experienced an impressive run, with the Dow Jones Industrial Average and S&P 500 poised for a seventh consecutive week of gains. This rally has been driven by anticipation of rate cuts as inflation weakens and economic growth slows. However, the Fed's recent signaling suggests that it may have completed the series of rate increases that began in March 2022, pushing the fed-funds rate from near zero to 5.25%-5.5%.
Following a policy-setting committee meeting this week, the Fed opted to keep borrowing costs unchanged. This decision continues to highlight the potential divergence between market expectations and the central bank's outlook.
In conclusion, while investors have been anticipating rate cuts, John Williams' remarks serve as a reminder that the possibility of a near-term reduction may not be as imminent as previously thought. The stock market's upward trajectory has undoubtedly been impressive, but it remains to be seen how it will react to this new perspective from the New York Fed president.
Market Risks and Forecasts
Despite the positive projections among Federal Reserve (Fed) officials, there are concerns about markets being too optimistic. The Fed's "dot plot" indicates a median forecast of a 4.6% interest rate by the end of next year, which translates to three quarter-point cuts. However, traders have a different perspective.
Interest-rate futures prices suggest a likelihood of more than two-thirds that the Fed will implement its first rate cut by March. Additionally, there is a 25% chance that the central bank will deliver seven quarter-point cuts by the end of 2024, according to the CME FedWatch Tool.
Following Williams' remarks, both the Dow and S&P 500 experienced premarket gains before declining during trading.
It is crucial for market expectations, Fed forecasts, and actual rate trends to align at some point. On Wall Street, it is often said that markets cannot defy the Fed. However, traders, along with individuals like Williams, seem to be setting themselves up for a potential clash.
This situation poses a risk for stocks, particularly considering that the first projected rate cut will not take place until March. Inflation currently surpasses the Fed's target of 2%.
Williams emphasized that data can be unpredictable, even within a year. Hence, investors must keep this in mind.
