Wall Street widely expects the Federal Reserve to keep interest rates unchanged on Wednesday after the conclusion of its two-day policy meeting.
It’s after the holidays that things could get tricky.
“We expect no change in rates this year,” said Jeffrey Roach, chief economist at LPL Financial, adding that he expects Fed talk of potential rate cuts to surface a few months into 2024.
“It’s going to be extremely important to see how holiday sales go,” Roach said by phone. “If holiday sales are OK, then it’s likely a second-quarter event,” he said of Fed conversations around lower rates.
No change to rates would keep the Fed’s policy rate at a 22-year high, giving the central bank more time to monitor the effects of its rate hikes as it presses on with a fight to get inflation down to its 2% annual target.
As a general rule of thumb, stocks typically rise after the Fed cuts rates. That wasn’t the case in March 2020 with emergency cuts to offset the COVID crisis, but the S&P 500 was back in record territory in six months, with the help of low rates and trillions of dollars in pandemic stimulus.
The central bank’s “dot plot” in June included the equivalent of four 25-basis-point cuts to the current 5.25% to 5.5% policy range (see chart) next year, with the rate eventually expected to fall closer to 3%.
The odds on Wall Street since September have been pointing to a similar pattern for rates next year. However, the Fed’s dot plots aren’t set in stone. Fresh dots are released four times a year and serve as a guidepost to central bankers’ thinking on the economic outlook. The latest dot update is due on Wednesday.
“Historically, the dot plot is a poor predictor of where rates go,” Roche said.
With that in mind, here are other big takeaways from Wall Street about the outlook for rates:
- One more rate hike this year, but rates will stay higher for longer than the market currently anticipates. Cuts come when economic data deteriorates, but that will be hard to time. — Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute.
- Another rate increase is more likely to occur before any rate cuts, with inflation still above the Fed’s target. Rates elevated but stable in 2024. — Saira Malike, chief investment officer at Nuveen.
- The Fed is done hiking rates but the market isn’t pricing in the probability of Fed rate cuts until June 2024, whereas we’re looking for rates to be cut anywhere from 4-5 times next year — Dave Sekera, chief U.S. market strategist at Morningstar Research Services.
- A pothole in fourth-quarter growth will convince more members of the Fed’s rate-setting committee about forgoing a final rate hike in 2023. — Goldman Sachs economics research team led by Jan Hatzius. Their call is for the median dot to show rates from 2023-2026 to follow this trajectory: 5.625%, 4.625%, 3.375%, 2.875%.
Stocks were lower Tuesday a day before the Fed’s rate decision. But the Dow Jones Industrial Average DJIA still was up 3.7% on the year, the S&P 500 index about SPX 15% higher and the Nasdaq Composite Index COMP up 30% in 2023, according to FactSet. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y lending rate for Wall Street was at 4.34%, near the highest in 16 years.