The US central bank hurt stocks after it announced its latest monetary policy plans.
SP 500 – Daily Chart
The S&P 500 has found resistance at the 4,900 level and could pull back to 4,820 to test the previous all-time high.
The Federal Reserve said Wednesday it was keeping its benchmark interest rates at their current levels, with improving consumer confidence and a declining inflation rate as drivers. In the days before the latest announcement, some Fed officials had been signalling that the current rate has been enough to pull inflation down. At the same time, markets increased their bets on early rate cuts.
In December, the 12-month consumer price index was 3.3%, close to the Fed’s 2% target and little changed monthly. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, was even lower, at 2.6%.
In remarks this month, Fed governor Christopher Waller said slower inflation, combined with continued employment gains, had created an economic landscape that was “almost as good as it gets.”
“The progress I have noted on inflation, combined with the data in hand on economic and financial conditions and my outlook has made me more confident than I have been since 2021 that inflation is on a path to 2%,” he said.
The Fed Chair Jerome Powell said, “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting” to cut rates. But he did say it was likely this year.
However, traders still believe the economy remains strong enough for an estimated first rate cut in March with a probability of 61.5%, but down from a 73% likelihood a month ago. March will be the two-year mark since the Fed started raising rates at the onset of the Russia/Ukraine conflict. Some analysts are still determining if the Fed will take action.
“We think markets are overly optimistic that we’ll see a Fed interest rate cut in March,” Vanguard chief global economist Joe Davis said.
“It likely will be midyear before policymakers are confident that they have reined in inflation sufficiently to start cutting their target for short-term interest rates.”
For now, traders should look for a potential correction in stocks as AI expectations have cooled and rate cut expectations are also slowing down.
