The U.S. Federal Reserve gave investors a nice Christmas present this past week.
The Federal Reserve, headed by Jerome Powell, meets eight times a year, usually every six weeks. On Wednesday of their meetings, they announce their rate decisions and Powell holds a news briefing after the Federal Open Market Committee (FOMC) regularly scheduled meeting.
Their last meeting for 2023 was held Dec. 12-13. The expectation was for the Fed to confirm they were no longer raising interest rates. Essentially, they had beaten inflation and no longer needed to slow the economy. Inflation in 2022 was 8%, which was the highest since 1981. This was due to multiple factors, including deglobalization, supply chain issues, fiscal and monetary stimulus, etc. Inflation leads to a loss in purchasing power, thus hurting consumers, so the Fed wants to keep inflation in check. The Fed has two mandates: to achieve maximum employment and keep prices stable. Fed rate increases in 2022 and 2023 were to stabilize prices.
The Fed went further than expected at their December meeting, indicating holding rates steady and indicating three rate cuts coming in 2024. As with any economic surprise, the markets reacted quickly. The three-rate cut statement sent U.S. stocks soaring. The Dow climbed 200 points after the Fed decision, hitting new highs, and the S &P and the Nasdaq were up .6%. The Santa rally is in full force.
Rising interest rates slow the economy, making business loans and mortgage loans more expensive. Lower rates create more business opportunities by making it cheaper to borrow to fund projects or buy a new home. Decreasing interest rates are favorable for stocks.
On the other hand, higher rates helped people looking for higher interest rates on money in savings and money markets. As rates rose, more people put money into cash.
At the end of November, cash was sitting at $5.84 trillion for investors. With rates decreasing, that cash is likely to be deployed into bonds and stocks. This is bullish for the markets.
Productivity growth is back, and AI looks to help companies do more with less. This is positive for corporate earnings and thus favorable for stocks.
Real wage growth is positive. Wage increases are outpacing inflation, which means increasing buying power for workers. This is favorable for the economy as the consumer is about 70% of the U.S. economy. If the consumer is spending, the economy is happy.
As always, the economy faces headwinds. There are many geopolitical risks, the large increases in rates over the past two years could still lead to recession, and earnings estimates are high so investing will have risk and volatility, as always.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
