Federal Reserve officials made a concerted effort this past week to stress that Fed rate cuts will be slower and less aggressive than investors have been expected. That message is starting to get through to Wall Street, though that didn’t stop the stock market rally.
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At the Dec. 12-13 Fed meeting, policymakers signaled that the central bank would cut rates three times in 2024, confirming a pivot from Fed rate hikes. But markets immediately expected six quarter-point rate cuts for the year, or 150 basis points, with the first cut coming in March.
But last week several Fed policymakers, along with European Central Bank officials, pushed back on aggressive rate cuts.
On Tuesday, Fed Gov. Christopher Waller, stressed that the Fed should cut rates “methodically and carefully” and definitely not “rushed.”
On Wednesday, Atlanta Fed President Raphael Bostic said he sees rate cuts starting in the third quarter. On Friday afternoon, San Francisco Fed President Mary Daly suggested policymakers must be “patient” about rate cuts.
All three officials are voting members of the Federal Open Market Committee in 2024.
As a recent of Fed jawboning, the odds of a March rate cut fell to 47.2% as of Friday, according to the CME FedWatch Tool. Just a week earlier, markets saw an 81% chance of a Fed rate cut.
For the full year, markets now strongly expect five quarter-point rate cuts, with the odds of a sixth rate cut now slightly below 50%.
Meanwhile, European Central Bank President Christine Lagarde and several other ECB policymakers signaled that a June rate cut was likely, but not before.
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Treasury Yields
The central bank commentary, along with generally strong U.S. economic data, pushed up market rates.
The 10-year Treasury yield, which hit a record low of 3.785% on Dec. 27, moved decisively above the 4% level last week. The 10-year yield jumped 20 basis points to 4.15%, clearing the 200-day line. The two-year Treasury bond yield, more closely tied to Fed policy, soared 27 basis points to 4.41%.
That’s important, because ultimately Fed policy is about influencing market rates. Financial conditions had eased considerably since late October, when the 10-year Treasury yield briefly hit 5%. Yields are still well off those highs, but recoup some of their late 2023 losses.
Stock Market Rally Continues, For Now
The stock market rally initially retreated following the comments by Waller, Bostic, Lagarde and others, with the major indexes falling on Tuesday and Wednesday.
But markets revved higher, buoyed by Thursday’s bullish 2024 guidance from chip foundry Taiwan Semiconductor (TSM). By Friday’s close, the Dow Jones and S&P 500 hit record highs, while the Nasdaq set a two-year best.
Can the stock market continue to advance if Treasury yields keep rising? Notably, the 10-year yield hit resistance at its 50-day line on Friday.
The stock market has shown in recent years that it may shrug off rising Treasury yields for a time, but not indefinitely.
The European Central Bank holds its next policy meeting on Jan. 25. Fed policymakers gather on Jan. 30-31.
Please follow Ed Carson on Threads at @edcarson1971, X/Twitter at @IBD_ECarson and Bluesky at @edcarson.bsky.social for stock market updates and more.
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