Federal Reserve Chairman Jerome Powell made it clear in several public appearances last week that the central bank was unlikely to cut interest rates in March.
But stock market bulls aren't worried that interest rate cut expectations will fade. And it has more to do with what Powell has been saying about strong economic indicators.
The Fed chair noted that a strong labor market and economic growth are no longer the primary concerns when the Fed cuts interest rates.
“We don't want the labor market to weaken,'' Chairman Powell said on January 31, adding, “Inflation has continued to decline over the past six months, so we expect inflation to continue to decline.'' “I am doing so,” he said.
In other words, good economic news should no longer be perceived as “bad” just because it means another Fed rate hike is on the horizon. Rather, good economic news means business, so it's simply good news for the stock market. Activity is increasing. And in the long run, that's usually a welcome sign for investors.
“From a macroeconomic perspective, generally speaking, the U.S. economy is the most important driver of stock performance broadly,” Goldman Sachs equity strategist Ben Snyder told Yahoo Finance last month. “It's happening,” he said.
He added: “I don't think it matters much whether the Fed starts cutting rates in March, May, or June. “It's encouraging certain investors to drain cash and cut costs,” he added. Improve the capital environment for small and medium-sized enterprises that often rely on external financing. ”
Snyder confirmed to Yahoo Finance after Wednesday's Fed meeting that nothing Powell said at the Fed press conference changed his mind. He pointed to an update to the Fed's forecasts that Goldman's economics team released after the January Fed meeting. Goldman now expects the first rate cut to be in May rather than March, but he maintained his commitment to eight 25 basis point (bp) rate cuts over the next two years.
This narrative is also reflected in consensus estimates compiled by Bloomberg. As of Monday, the market was expecting interest rates to be around 4% at the end of 2024, despite Powell's comments and last week's strong jobs report.This is about the same level as the past two months..
Taken together, this can be interpreted to mean that the story for 2024 and even 2025 remains unchanged, at least in the view of some bullish strategists. If the Fed cuts interest rates because of falling inflation rather than a sign of economic weakness, the bullish situation for stocks will remain.