Major U.S. stock indexes gave up early gains to end Thursday only slightly higher than where they started as investors weighed a possible end to the Federal Reserve's rate-hiking cycle against concerns over the health of the banking sector and broader economy.
The Fed's decision to raise its benchmark funds rate by a quarter-point Wednesday met market expectations, "but raised questions about what's next," says Alex Coffey, senior trading strategist at TD Ameritrade. While the Fed seems to be backing away from the brisk pace of rate increases we’ve seen over the past year, the market is still digesting potentially ambiguous language from Fed Chairman Jerome Powell about how the central bank plans to deal with consumer price increases that are still “too high.” Speaking at the conclusion of the Fed’s meeting, Powell said "some additional policy firming may be needed." At the same time, the possibility of recession is tamping down bullish inclinations among investors.
The Federal Open Market Committee (FOMC) “still expects at least one more 25 basis-point hike this year, but will that occur at the May meeting or later?" Alex says. The FOMC expects rates to fall in 2024, "but when will the cuts begin? It's too soon to tell, and much depends on the course of inflation and possible credit tightening in coming months."
He adds that while stock investors might welcome a potential end to rate increases, a decision by Fed officials to end their rate-hiking cycle sooner than previously expected could indicate potential problems ahead.
The following is a round-up of today's market activity:
- The S&P 500 Index was up 11.75 (0.3%) at 3948.72; the Dow Jones industrial average was up 75.14 (0.2%) at 32,105.25; the Nasdaq Composite was up 117.44 (1.0%) at 11,787.40.
- The 10-year Treasury yield was down about 11 basis points at 3.391%.
- Cboe's Volatility Index was up 0.35 at 22.61.
The energy sector led declines Thursday as crude oil futures fell back under $70 a barrel, with financials and consumer staples also losing ground. Technology and communications stocks managed to hold onto gains. Gold futures surged over 2% to a one-year high near $2,000 an ounce.
Will Fed stand pat?
Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research, says bond markets are pricing in the possibility that Wednesday's hike was the last of this cycle. Late Thursday, the CME FedWatch Tool reflected a nearly 71% chance that the FOMC will keep rates unchanged at its May meeting, despite Powell's remarks about the potential need for "addition policy firming."
Collin says "we’re not so sure" whether further increases will be necessary. Financial conditions "have tightened considerably lately, and with all eyes on banks these days, most banks will likely continue to rein in their lending and be a bit more stringent around who they’ll lend to."
As the market processed the latest Fed move, economic signals contributed to a general tone of uncertainty.
Early Thursday, the Census Bureau reported that sales of newly constructed homes rose 1.1% in February from January, confounding economists’ expectations for a drop of 4.5%. Still, sales were down 19% from the same month a year ago, likely reflecting the sharp increase in interest rates. Also Thursday, the Labor Department reported weekly initial jobless claims at 191,000, suggesting the job market is still quite strong despite the pressure from the Fed’s tightening campaign.
