Wall Street widely expects the Federal Reserve to keep interest rates unchanged on Wednesday after the conclusion of its two-day policy meeting. However, it’s the period after the holidays that could potentially become more challenging.
No Change in Rates Expected This Year
Jeffrey Roach, chief economist at LPL Financial, believes that there will be no change in rates this year. He further predicts that conversations around potential rate cuts may arise a few months into 2024. Roach emphasizes the significance of holiday sales in determining when discussions about lower rates will occur, stating that if holiday sales are satisfactory, it is likely to happen in the second quarter.
Maintaining Rates at a 22-Year High
Maintaining the current rates would keep the Fed’s policy rate at a 22-year high, allowing the central bank to continue monitoring the impact of its rate hikes as it persists in its efforts to bring down inflation to its target of 2% annually.
Stocks and Rate Cuts
While it is generally observed that stocks tend to rise after the Fed cuts rates, the COVID crisis in March 2020 defied this trend. However, with the aid of low rates and significant pandemic stimulus, the S&P 500 regained record territory within six months.
Fed’s “Dot Plot” and Rate Projections
In June, the central bank’s “dot plot” indicated the possibility of four 25-basis-point cuts to the current policy range of 5.25% to 5.5% next year, with rates eventually expected to decrease further to around 3%. However, it is important to note that the Fed’s dot plots are not set in stone, as they are updated four times a year. The latest update will be released on Wednesday.
Historical Inaccuracy of Dot Plot
Jeffrey Roach points out that historically, the dot plot has proven to be a poor predictor of future rate movements.
Key Takeaways for Rate Outlook
Here are some additional insights from Wall Street regarding the outlook for rates.
A Closer Look at Interest Rate Predictions
Experts weighed in on the future of interest rates, with differing opinions on rate hikes and cuts. Here’s what they had to say:
Brian Rehling: Rates to Stay Higher for Longer
According to Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, there is likely to be one more rate hike this year. However, he believes that rates will stay elevated for a longer period than the market currently expects. Rehling emphasizes the difficulty of timing rate cuts, as they usually follow economic data deterioration.
Saira Malike: Another Rate Increase More Likely
Saira Malike, chief investment officer at Nuveen, suggests that another rate increase is more likely to occur before any rate cuts. This is due to inflation remaining above the Federal Reserve’s target. Malike predicts that rates will remain elevated but stable throughout 2024.
Dave Sekera: Market Underestimating Rate Cuts
Contrary to market expectations, Dave Sekera, chief U.S. market strategist at Morningstar Research Services, believes that the Federal Reserve will cut rates much sooner than anticipated. While the market is not pricing in rate cuts until June 2024, Sekera expects rates to be cut between 4-5 times next year.
Goldman Sachs Economics Research Team: Final Rate Hike Unlikely
Goldman Sachs’ economics research team, led by Jan Hatzius, suggests that a potential pothole in fourth-quarter growth might convince more members of the Fed’s rate-setting committee to forgo a final rate hike in 2023. Their predictions indicate rates following a trajectory of 5.625%, 4.625%, 3.375%, and 2.875% from 2023 to 2026.
Overall, these expert opinions demonstrate varying perspectives on interest rates and their future trajectory.
Stock Performance and Treasury Yields
Meanwhile, in the stock market, small gains were seen on Monday ahead of the Fed meeting. According to FactSet, the Dow Jones Industrial Average (DJIA) has experienced a 4.5% increase this year, while the S&P 500 index (SPX) has risen by 16%. The Nasdaq Composite Index (COMP) has seen the most significant jump, with a 31% increase in 2023.
As for the benchmark 10-year Treasury yield (BX:TMUBMUSD10Y), it stands at 4.318%, reaching levels not seen in 16 years.
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