U.S. stocks registered modest gains on Monday but managed to close at new highs for the year, ahead of significant market catalysts this week that include inflation readings and the Federal Reserve’s policy announcement, which will strongly influence investor expectations on the path of interest rates.
Investors remain wary of inflation, especially after the Fed raised interest rates three times this year to tamp down on the threat. That has led to higher home mortgage rates, a sluggish housing sector, and slowing growth overall.
The Fed has a tricky balance to strike, with the central bank trying to snuff out inflation trends without triggering a recession and hurting the economy. The good news is that despite the recent price rise, overall inflation remains subdued, and the labor market continues to improve. The risk, however, is that the inflation trend continues to pick up steam and that the Fed’s current interest rate hike cycle – including three increases in 2018 – will cause an economic slowdown and possibly trigger a recession.
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As a result, the stock market remains cautious and focuses on what the Fed will say when it announces its policy decision Wednesday afternoon. The Fed is expected to keep rates unchanged. However, many observers believe the central bank could cut interest rates in the first half of next year if economic conditions deteriorate significantly.
The market is also waiting for the Fed’s latest “dot plot” outlining the central bank’s expected interest rate trajectory over the next few years. The most recent plot published in September implied that the Fed was likely to raise rates once or twice more this year and only twice in 2024, at the most.
Investors will be paying close attention to the latest jobs report on Friday and a pair of reports on consumer sentiment and homebuilding. Investors will be looking for further evidence that the economy is strong enough to withstand a rate cut, particularly after last month’s jobs report missed expectations and sent stocks lower.