The Federal Reserve’s rate-raising campaign is entering its final week, and investors are betting that officials will start cutting borrowing costs soon. That bold wager is helping stocks near records and extending a rally in bonds and oil.
Investors have lowered their expectations that the Fed will raise rates again next year and pushed up expectations for cuts, even to five quarter percentage points at least in 2024. The change in market prices is based on the notion that the Fed has walked a tightrope, raising rates enough to slow the economy and help control inflation but not so much that it tips into recession.
“If growth is slowing and inflation is heading back toward target, a few rate cuts will make sense,” said Seema Shah, chief global strategist at Principal Asset Management. “For that to happen, the Fed must be very dovish.”
Stocks gained as the Fed’s latest statement was more dovish than expected. A flurry of earnings reports also helped. Bank of America jumped 2.3% after the company reported a more robust quarterly profit than forecasted. That lifted the S&P 500 and helped push it to a new record.
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Europe’s main share indexes rose, and the dollar fell to five-month lows. The pan-European STOXX 600 index rose 0.2% to approach a 23-month high set two weeks ago. The euro slipped against the dollar to a session low of $1.1380, which helped the region’s bond markets. Yields on European government debt fell to record lows.
The S&P 500 was up 1.4% to a new record in the United States as investors digested the Fed’s policy statement and watched economic reports. The Dow Jones Industrial Average gained 1.3% to another record, putting it on course for gains of about 13% this year. The tech-heavy Nasdaq Composite added 1.4%.
Investors will also watch for the latest jobs data later Thursday, which could offer more clues on the Fed’s outlook. The labor force report may show that hiring picked up in December. The number of workers leaving the economy, known as the unemployment rate, will be reported separately. Both figures are critical indicators of economic health. The data are due to be released at 8:30 a.m. ET (13:30 GMT). Investors will look for signs that a slowdown in US job creation hasn’t accelerated inflation and a wage rebound to drive consumer spending. The data will be critical in determining whether the Fed will raise rates in March. Traders have already built up bets that the central bank will cut rates next year, and the market has a 70% chance of a rate cut by its second meeting in March, according to Fed swaps pricing.