Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 6% this week.
  • Capital markets, having endured a slog since July, rallied sharply this week. Macro data and the Fed’s decision to hold off on hiking interest rates have sent a signal that the Fed may be finished raising interest rates for this cycle.

Since July, capital markets have been giving the Federal Reserve a wary side-eye. Inflation, while falling, is not yet at the Fed’s preferred target, and employment has been tight. A few weeks ago, futures markets held decent odds for further rate hikes in December and into early 2024.

Inflation has continued to moderate, and now there are growing signs that employment is slowly loosening. Along with anecdotal evidence in the Fed’s regional economic surveys, in which there are fewer and fewer employer complaints about finding people to work, the jobs report on Friday came in a touch soft. That report is adding to a constellation of data pointing to a slowdown in employment.

The Federal Open Market Committee (FOMC), the part of the Fed that makes interest rate decisions, held its November meeting on Wednesday. As expected, the FOMC decided to stand pat on rates. There were a few notable statements from Fed Chair Jerome Powell at his press conference, including this: “The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening have yet to be felt.”

Markets cheered Mr. Powell’s presser. The S&P 500 rallied over 1% as he spoke – a rarity amongst his press conferences – and ended the week up 6%, its best week in a year. Small cap stocks, represented by the Russell 2000 index, were up 7.5%, their best week in two years. Interest rates fell – the thirty-year US Treasury is now off 50 basis points from its high. The average 30-year fixed rate mortgage is now 7.3%, down from over 8%.

This week’s positive market action has the whiff of an “inflection point”. Given the trends in the data, if the Fed believes it is in a restrictive stance, the likelihood of future Fed rate hikes is going down. Now, the market is shifting to decent odds for rate cuts next year. Markets increasingly believe that the Fed rate hike in July 2023 was its last for this cycle.

There is also a broader picture when considering the Fed’s policy decisions in 2024. This week, the financial journalist Conor Sen spoke to the arc of Jerome Powell’s stint as Fed Chair since 2018, when he was appointed by President Trump. Powell led the Fed to cut rates quickly in 2019 as it became apparent that the hikes of 2018 were unnecessary; the Fed sliced rates to zero almost overnight as the COVID pandemic hit the economy in 2020; and Mr. Powell has paid attention to employment and showed a willingness to adopt a flexible inflation target.

Mr. Sen’s point is that Jerome Powell’s predilection has been to move early to minimize the odds of a recession and that rate cuts may come sooner than most believe. While in the past, the Fed has typically begun cutting too late – “by the time the Fed starts cutting, the economy is already heading to a recession” – Mr. Powell has demonstrated that he is willing to move to rate cuts early to avoid such an outcome. This week, markets placed a greater probability of that outlook coming to fruition in 2024.


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