One might forgive the Federal Reserve Board if it just declared victory over inflation at its meeting this week.
Don’t bet on it. The Fed is obsessed with inflation, which hit 9% in the summer of 2022 and has come down substantially since then.
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The Fed, led by Chairman Jerome Powell, wants to see inflation drop to 2%, even if it is an arbitrary number — formulated by New Zealand’s central bank 30 years ago. U.S. inflation is hovering just below 3%.
Many investors are worried that current inflation indicators suggest getting it to 2% may take longer than anyone wants — especially Donald Trump.
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Powell is one who has cautioned patience on rate cuts. The economy is very strong, he told attendees at The New York Times Dealbook Summit on Dec. 5, and, he added, the Fed “can afford to be more cautious as it lowers rates.”
The conundrum will color the Fed’s December meeting. It starts Tuesday and ends Wednesday when the Fed is expected to cut its current key federal funds rate to 4.25% to 4.5% from 4.5% to 4.75%. It had been as high as 5.25% to 5.5% as late as the fall of 2023.
The federal funds rate is what short-term rates in the United States are built on.
The worry for Wall Street and investors around the world is this: Will Powell announce the Fed is pausing rate cuts to hasten inflation’s march to 2%? An announcement could be part of the Fed’s post-meeting statement or during Powell’s news conference afterward.
Powell does have a problem with rates. The Fed has been cutting the Fed’s key rates. But, if anything, the bond markets have boosted the cost of money at the same time.
Is investor excitement too great?
A pause on rate cuts has big risks. It could stall the big stock market rally that erupted with Trump’s Nov. 5 election. It could enrage the President-elect.
The S&P 500 is up nearly 27% in 2024 on top of a 22.4% gain in 2023. The Nasdaq’s gain 32.7% gain on the year is after a 43.4% romp in 2023.
The history suggests two years of big gains beget a third year. Especially if one believes artificial intelligence really is a revolution.
And years ending in five are good for markets, too. If investors are confident about the Fed and rates.
If interest rates don’t suddenly shoot higher.
And all this along with the great excitement about over-the-top earnings from chipmaker Broadcom (AVGO) , whose shares jumped 24% Friday after reporting a 51% revenue increase. Its market capitalization topped $1 trillion for the first time, the eighth company to reach that level.
The Nasdaq-100 Index, which is heavily weighted toward the hottest stocks, did hit a new closing peak of 21,780 on Friday, and it announced that Palantir (PLTR) , MicroStrategy (MSTR) and Axon Enterprise (AAXN) will join the index before Dec. 23 open.
A peculiar market
Yet, the market overall was middling this past week. The S&P 500 was off 0.6%. The Nasdaq Composite was up, but only 0.3% after hitting a closing high on Wednesday at 20,035.
The Dow Jones Industrial Average dropped 1.8%, and the index has fallen for seven straight sessions. The last time that happened was in February 2020 as the Covid-19 pandemic shut down the global economy.
Every day this past week, more than half the stocks in the S&P 500 ended lower on the day. Nine of 11 S&P 500 sectors were down on the week.
Investor Jon Markman called the market’s state “peculiar.”
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Two weeks ago, everyone was talking about widening market breadth, he noted in his weekly memo to investors. Then, the excitement stopped. “The biggest technology platforms are sucking the oxygen out of the room with breathtaking growth, brighter prospects and rampant innovation.”
The S&P 500 is up 8.1% since Nov. 5. It could also be that the post-election rally just needs a nap.
More Economic Analysis:
- Trump Trade puts stocks at record. Where do we go from here?
- Fed inflation gauge higher in October amid consumer spending boost
- Goldman Sachs analyst sees starting point for year-end S&P 500 rally
Interest rates just won’t go away
Interest rates and the Fed meeting are probably also responsible for at least some of the the malaise.
The 10-year Treasury yield hit 4.4%, pushing mortgage rates higher nearly to 7%, a rate that’s weighed heavily on home sales since . One can sure to hear about that this week with three housing reports:
- The National Association of Home Builders’ Housing Market Index on Tuesday.
- The Commerce Department report on November building permits and housing starts on Wednesday.
- Existing home sales, from the National Association of Realtors, on Thursday.
And you can be sure Lennar Corp. (LEN) officials will talk about rates on Thursday when it reports fiscal fourth-quarter earnings. Shares fell 5.5% last week — and 13.6% since Nov. 25 — on worries about rising rates hitting sales.
Micron, Nike, Accenture, FedEx earnings on tap
Also reporting earnings this week are:
Wednesday
Thursday
- Athletic shoe and equipment giant Nike (NKE) .
- Consulting company Accenture (ACN)
- Package shipping giant FedEx (FDX)
Friday
- Cruise line operator Carnival (CCL)
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