Investors, hoping for an early Federal Reserve rate cut, received a stark reminder of the U.S. central bank's commitment to battling inflation as Fed Governor Jerome Powell tempered expectations of a rate reduction in March.
At the end of the first monetary policy meeting of the year on Wednesday, Powell stated that persistently high inflation levels above the Fed's target would likely stop policymakers from implementing rate cuts at the upcoming March meeting, disappointing some investors.
Despite the delay in rate-cut expectations, some market players have reassessed their stance, emphasizing the significance of the ongoing decline in consumer prices and stable economic growth over the precise timing of the initial cut. Markets continue to factor in a projected Fed rate cut of approximately 140 basis points this year, a figure that surpasses the Fed's forecast of 75 basis points.
On the other hand, some perceive Powell's cautious approach, combined with resurfacing concerns about the U.S. banking sector and mixed earnings reports from tech giants, as potential factors that could decelerate the market rally that propelled the S&P 500 to a historic peak in January and potentially exert downward pressure on bonds.
Late last year, stocks and bonds experienced a surge on the anticipation that the Federal Reserve had reached the zenith of its rate-hiking endeavors and would imminently start a cutting cycle. The prospect of easing monetary policy is generally viewed favorably for stocks, as it diminishes cash costs for companies and households and reduces bond yields.
That being said, some investors harbor concerns that the pace of this growth might be excessive. Recent statements from Fed officials have pushed back against the idea of an immediate rate cut, and the sustained robustness of the economy has prompted worries that a rapid reduction in rates could potentially revive inflation.
By Wednesday, futures tied to the Fed's basic rate indicated a 36% probability of an initial rate cut in March, marking a decrease from the 58% probability before Powell's news conference. Meanwhile, the likelihood of a rate cut in May increased to almost 60%, up from 51%.
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