Stocks surge after Fed indicates three rate cuts still coming this year

Wednesday marked Federal Reserve Chair Jerome Powell's 49th press conference since he assumed the role six years ago. His lengthy tenure showed more than usual.

Powell maintained a straight face throughout most of the briefing, which lasted the usual hour or so. But at times it seemed he was perhaps itching to head for the door.

Here are five moments that stood out:

A reporter asked Powell to provide an update on the central bank's efforts to potentially develop a digital dollar that would function similarly to cryptocurrency in that there would be no physical version. "I think we've been pretty transparent on this, but I will try harder," Powell responded.

He then proceeded to give the reporter a more lengthy response but asserted that it was "wrong" to say the central bank was working on a digital dollar in a secret lab and they're "going to spring it on Congress in the right moment."

Another reporter asked the chair if he was looking for complete unanimity among officials on the rate-setting committee before cutting interest rates. "People do dissent. It's something that happens. Life goes on. And it's not a problem — we've always had dissents," Powell replied.

He got a room full of economics reporters to break out into laughter for a brief moment with his response to a question on whether he'd like to "put the genie back in the bottle" to a time when the central bank was less transparent. "Of course... not," Powell said.

Fed watchers treat every word Powell says like it's coming straight from the Bible. So naturally when he said the Fed was looking to slow the pace of selling securities "fairly soon" a reporter wanted to know what that meant. But Powell had little to add. "Fairly soon [are] words we use to mean fairly soon," he said.

US stocks soared to new highs in Wednesday afternoon trading as investors cheered the Federal Reserve's policy rate decision, economic projections and Fed Chair Jerome Powell's press conference.

The central bank kept interest rates unchanged but indicated that there would still be three rate cuts this year. Before the meeting, some investors had worried that the Fed would lower that projection.

The S&P 500 reached a new record and topped the 5,200 level for the first time ever, closing 0.9% higher, at 5,224.62.

The blue-chip Dow also reached a record, up 401 points, or 1%, at 39,511.34.

The tech-heavy Nasdaq hit 16,369.41, also a new high.

During the back half of 2023, the Federal Reserve (and all Americans, for that matter) got some welcome news on the inflation front: The pace of price hikes had meaningfully cooled.

But then in January and again in February, things got hot: Inflation rose at its fastest clip in months, thanks in part to rising gas prices, annual seasonal adjustment factors and stubbornly high shelter costs.

Fed Chair Jerome Powell on Wednesday noted that while some "seasonal effects" were likely at play, the central bank is not dismissive of the data. If anything, the initial reports for 2024 reinforce the Fed's expectations and actions to date, he said.

"It certainly hasn't raised anyone's confidence; but I would say that the story is really essentially the same, and that is of inflation coming down gradually toward 2% on a sometimes bumpy path," Powell said.

He added: "We've got nine months of 2.5% inflation now. We've had two months of bumpy inflation; it's going to be a bumpy ride."

As to whether that ride will get any smoother soon, or is it a sign of inflation turning in the wrong direction: "We will have to find out," he said, adding that the "economy is strong, inflation has come way down, and that gives us the ability to evaluate this question carefully."

All three major indexes were on pace to close at all-time highs on Wednesday afternoon, as investors cheered the Federal Reserve's statement that it still expects three interest rate cuts this year.

The S&P 500 gained 0.7%, reaching an intraday record of 5,200 for the first time. The Dow rose 345 points, or 0.9%, and the Nasdaq Composite added 1.1%.

Investors worried that the Fed could forecast fewer than three rate cuts this year, as economic reports in recent months has shown that inflation remains elevated and the labor market strong. Stocks teetered leading up to the Fed's latest decision, but began to climb soon after.

The Federal Reserve’s decision may be disappointing to some investors, homebuyers and those with a lot of credit card debt, since movement in the Fed’s overnight lending rate influences rates — directly or indirectly — on consumer financial products (e.g., credit cards, bank loans and mortgages).

But with the Fed signaling that no rate cuts are likely until summer, it also means anyone with savings still has a couple more months to make hay of their stash.

That’s because you can still get inflation-beating interest rates that will grow any money you have set aside for emergencies, vacations, down payments or any other goal in your sights over the next several years.

However, that won’t happen if you just let it sit in a traditional checking or savings account that yields next to nothing. There are more lucrative, low-risk options out there, with rates that are still at or near their peaks. “But perhaps not for much longer,” said Ted Rossman, senior analyst at Bankrate. “If one of those fits into your financial plans, it’s best to act soon.”

Read more here on where to park your hard-earned savings.

Investors are still digesting Wednesday's Federal Reserve's policy rate decision, economic projections and Fed Chair Jerome Powell's press conference, but so far they seem to like what they've seen and heard.

"Despite projections of stronger growth, lower unemployment, and slightly higher core PCE inflation, policymakers still anticipate three rate cuts this year," wrote Whitney Watson, global co-head and co-chief investment officer of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management in a note on Wednesday afternoon.

Goldman Sachs lowered its estimates from four to three rate hikes earlier this week.

"The slight rise in the longer-run policy rate forecast is both negligible and noteworthy. It is negligible because market expectations are already much higher, but noteworthy as it reinforces the market's recent perception that the rate-cutting cycle may be shallower than initially anticipated," she said.

"Overall, despite recent bumps in the inflation road, major central banks remain on track for rate cuts in the coming months and high-quality fixed income bonds stand to benefit."

The Federal Reserve holding steady once again and keeping interest rates in the higher-for-longer realm likely will keep homebuyer demand muted, Fitch Ratings noted Wednesday.

“The latest Fed announcement confirmed that, despite likely short-term rate cuts later this year, mortgage rates will not fall enough to drive meaningfully higher origination volumes in 2024," Eric Orenstein, senior director, Fitch Ratings, wrote Wednesday.

Home sales fell off a cliff in 2023, dropping 17% from a yearly high in February and hitting a low in October, a month when the average 30-year mortgage rate hit a 23-year high of 7.79%. During the week ended March 14, the average 30-year fixed-rate mortgage was 6.74%.

Heading into 2024, however, industry economists were optimistic the tide would turn. The Mortgage Bankers Association forecast that mortgage origination volume would increase by 19%, to 5.2 million loans in 2024.

Existing home sales picked up in January, rising 3.1% from December. The February data will be released next week.

"Eventually, mortgage loan volumes should normalize with lower rates, though there are likely several more challenging quarters ahead for mortgage companies,” Orenstein noted.

Treasury yields wavered Wednesday afternoon after the Federal Reserve announcement that it is holding rates steady and reiterated that it expects to cut interest rates three times in 2024.

The 2-year yield fell to 4.65%, while the yield on the 10-year note fell to 4.28% before edging up.

"The immediate market reaction is the relief we were expecting," said Bryce Doty, senior portfolio manager at Sit Investment Associates. "Investors were worrying the Fed was going to pull back from rate cuts this year, so keeping three rate cuts on the table naturally pushes stocks higher and bonds yields lower."

Traders see a roughly 74% expectation that the Fed will cut rates in June, up from about 59% a day earlier, according to the CME FedWatch Tool.

"Powell has perhaps shown his cards: He needs a good reason not to cut rates, rather than a reason to cut rates," said Seema Shah, chief global strategist at Principal Asset Management. "However, there will be one question creating feelings of discomfort: how serious is the Fed about its 2% target?"

Federal Reserve officials predict US gross domestic product will expand at a 2.1% rate in 2024. That's a sizable change from the 1.4% growth rate they predicted in December.

Currently, the economy is growing at a 3.2% pace, which is well above what economists had anticipated a year ago. Strong consumer spending continues to power the economy and fend off a recession.

In addition to GDP, here's how Fed officials' projections compare to the ones they made in December: