February 25, 2024

US stocks fall as Powell chills rate cut hopes

Federal Reserve chair Jerome Powell has made clear over several public appearances in the last week that it’s unlikely the central bank cuts interest rates in March.

But stock market bulls aren’t worried about the shift back in rate cut expectations. And that has more to do with what Powell has been saying about strong economic data.

The Fed chair noted that a strong labor market and economic growth are no longer chief concerns for the Fed in when it will cut rates.

“We’re not looking for a weaker labor market,” Powell said on Jan. 31. “We’re looking for inflation to continue to come down, as it has been coming down for the last six months.”

In other words, good economic news should no longer be perceived as “bad” just because it could mean another Fed interest rate hike is coming. Instead, good economic news is simply good news for the stock market because it means business activity is picking up. And in the long run, that’s usually a welcome sign for investors.

“From a macroeconomic perspective, generally speaking, the US economy is the most important driver of equity performance broadly,” Goldman Sachs equity strategist Ben Snider told Yahoo Finance last month.

He added, “I don’t think it matters very much whether the Fed starts to cut in March or May or June. The key dynamic is that the Fed is incentivizing on-the-margin investors to move out of cash and reducing the cost of capital environment for small businesses that rely frequently on outside financing.”

Snider confirmed with Yahoo Finance following Wednesday’s Fed meeting that nothing Powell said in the Fed press conference changes his thinking. He pointed to Goldman’s economics team’s Fed forecast update after the January Fed meeting. Goldman now sees the first interest rate cut in May instead of March, but maintained a call for eight 25 basis point rate cuts in the next two years.

This narrative has played out in consensus estimates compiled by Bloomberg, too. As of Monday, the market projected interest rates to end 2024 around 4% despite Powell’s comments and a strong jobs report last week. That’s nearly the same level as the prior two months.

In aggregate, this can be taken to mean that the story for 2024 and even 2025, at least in the view of some bullish strategists, hasn’t changed. If the Fed cuts rates because inflation is falling, and not because signs of weakness in the economy, then the bull case for stocks remains in tact.

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