Federal Reserve Signals Rate Cuts in 2024, Impact on Stocks, Dollar, and Oil: Key Takeaways

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Investing.com – The U.S. Federal Reserve left interest rates unchanged at its final two-day meeting of 2023. But officials hinted they could start cutting rates next year, sparking a sharp rally in stocks and bonds. Attention has now turned to Europe’s central banks, where traders will be keen to see how strongly policymakers in the region are resisting hopes that they will adopt a dovish Fed-like stance.

1. Fed keeps rates unchanged and signals rate cuts in 2024

The US Federal Reserve kept rates unchanged at a more than 20-year high, but signaled it would begin reducing borrowing costs next year.

On Wednesday, the Federal Open Market Committee voted unanimously to keep rates between 5.25% and 5.50%, although the U.S. central bank’s quarterly dot plot of future rate expectations showed policymakers eyeing three quarter-point rate cuts in 2024, which is a softer forecast than previous estimates.

In comments that were closely watched after the decision, Fed Chairman Jerome Powell also acknowledged that the central bank is likely at or near the peak of rates this cycle.

Powell added that the Fed, which began an unprecedented cycle of rate hikes in an attempt to quell rising inflation, is now returning to the point where it seeks to prevent unemployment from rising. This observation suggests that while the Fed may not be entirely happy with the current pace of price increases, it may begin to shift its focus to preventing tighter policy from triggering a recession in the overall economy.

2. Futures rose after major US averages soared.

US stock futures rose on Thursday, suggesting a continuation of the previous session’s rapid gains driven by the Federal Reserve’s forecast for a rate cut next year.

By 05:01 ET (1001 GMT), the Dow contract was up 43 points, or 0.1%, S&P 500 futures were up 8 points, or 0.2%, and 52 points, or 0.3 %.

The major indexes on Wall Street rose on Wednesday, notably hitting a record high. The benchmark index hit its best close since 2022, while the technology index rose 1.4%.

US Treasury yields also fell on the Fed’s forecasts. The rate-sensitive 2-year Treasury yield fell to its lowest level since June and the benchmark 10-year yield fell to its weakest level since August. Returns typically move inversely to stock prices.

“The market looks at the median result [точечной диаграммы], and lo and behold, he sees the Fed leaning toward a rate cut in 2024, at least more than before,” ING analysts said in a note. “The Fed was expected to be much more hawkish.”

3. The dollar falls, rises

The dollar fell to its lowest level in four months on Thursday as traders raised hopes that the Federal Reserve will cut rates early next year.

The market is now pricing in a nearly 74% chance that the central bank will cut rates by 25 basis points at its March meeting and then by another quarter percentage point in May, according to Investing.com’s Fed Rate Tracker.

Heightened expectations of a rate cut could prove unattractive to foreign investment, affecting the relative value of the dollar. By 5:01 a.m. ET, the currency, which measures the U.S. currency against a basket of other currencies, was down 0.3% at 102.6.

“We continue to believe that the dollar will still have reasons to rebound on evidence of continued resilience in the outlook. [США]. However, this may already be history for January,” ING analysts said.

A weaker dollar has helped make gold less expensive for overseas buyers, pushing spot prices for the yellow metal above the key $2,000 per troy ounce level.

4. Central bank decisions in Europe are on the agenda

A number of European central banks are due to present their latest interest rate decisions, and the market is waiting with interest to see whether they will follow the Fed’s lead and leave borrowing costs unchanged.

The Bank of England and the European Central Bank, which are struggling to contain high inflation, will keep rates at 5.25% and 4.00% respectively, according to economists. Investors will also be watching how aggressively policymakers try to temper hopes of rate cuts next year.

Earlier on Thursday, the Swiss National Bank became the latest bank to keep rates unchanged and noted that rising price pressures had eased slightly over the past quarter.

However, Norway raised its key rate by 25 percentage points to 4.5%, citing stubbornly high inflation.

5. Oil prices rose amid falling inventories and the dovish attitude of the Federal Reserve.

Oil prices rose on Thursday amid a larger-than-expected weekly decline in U.S. storage inventories and a weaker dollar driven by a dovish Federal Reserve stance.

By 5:02 a.m. ET, U.S. crude futures were trading 1.8% higher at $70.74 a barrel, while the U.S. contract was up 1.9% at $75.69 a barrel.

U.S. oil inventories fell by 4.3 million barrels in the week ended Dec. 8, according to U.S. Energy Information Administration data released Wednesday, a much larger-than-expected 650,000 barrels. However, the decline comes amid consecutive weeks of strong inventory increases, which could indicate weakening winter demand.

From the editor

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2023-12-14 10:28:00
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