The end of the year is approaching and everyone wants to know the answer to this question for the Federal Reserve and its chair Jerome Powell: When will the Federal Reserve start cutting interest rates?
There may be a hint of an answer on Wednesday when the Federal Open Market Committee, the central bank's rate-setting body, releases its statement at the end of the meeting after a two-day meeting, followed by the press conference afterwards. to Chairman Jerome Powell's meeting.
The decision will be by far the biggest event to hit financial markets next week. There are also some earnings reports left to examine. And investors will watch what happens with interest rates and energy prices.
At some Federal Reserve meetings everyone knows what the Fed's plan will be well in advance. This time it's a little different because of what the Federal Reserve has done since March 2022, which was increase its key interest rate 11 times from almost 0% until July 26, when it raised its federal funds rate from 5 .25% to 5.5%.
The federal funds rate is what the central bank wants banks to charge each other for overnight loans and is the starting point for setting rates in the United States overall.
The rate remained at the 5.25%-5.5% level in the September and November meetings, while the dovish Powell and his colleagues have waged a fierce battle over the wave of inflation that emerged from the Covid pandemic -19.
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US inflation is definitely lower, and the Consumer Price Index report, due out on Tuesday, will likely say prices have risen perhaps 3.2% over the past 12 months. The Federal Reserve will respond by warning about the possibility of another bout of inflation, but will not touch rates.
And the first question at Powell's press conference on Wednesday will almost certainly be: “So when is the first rate cut?”
The suave Powell may pause before responding, but you can bet everyone interested in the topic will be listening.
Wall Street is betting big that the cut will come soon, perhaps as early as March. You can see it in interest rates.
The 10-year Treasury yield, which exerts a huge influence on mortgage rates, ended last week at 4.23%, down from a high of 5.02% in mid-October. The most recent Freddie Mac Mortgage Rate Survey placed the rate on new 30-year mortgages at 7.03%, below the high of 7.79% on October 26.
You can see the bet in fuel prices.
AAA National Average Gasoline Price reached $3,881 gallons in September. On December 9, it was at $3.167, below the 2022 close and 36% below the 2022 high of $5.01.
You can see the bet on the stock market:
- The Standard & Poor's 500 Index (^EN) – Get a free report closed at over 4,600 on Friday for the first time in almost 2 years.
- The Nasdaq Composite Index (^COMPX) – Get a free report is approaching a maximum of 52 weeks.
The S&P 500 has risen 9.7% just since the end of October. The Nasdaq is up 12.1%, while the Dow Jones Industrial Average (^DJI) – Get a free report has risen 9.7%.
Most of those gains came during the very strong month of November. So far in December, stocks have risen at a less frenetic pace.
The bottom line is this: Inflation has dropped substantially from the 9.1% reached in mid-June 2022. The CPI rose 3.2% year over year in September and October.
A debate on rate cuts
The discussion about whether the Federal Reserve should cut rates is loud. There are the obvious proponents of the idea, including the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association, which have jointly called on the Federal Reserve to stop raising rates.
Its members have been greatly affected by the increase in rates. Home buyers cannot buy houses. Vendors cannot sell them. Small builders who lack access to capital have seen their volumes fall. Home prices are falling in many markets.
The rising cost of capital helped kill at least 3,200 startups this year. technology/tech-startups-collapse.html”>the New York Times reported on December 7using data from tone bookthe Seattle firm that tracks trends in global capital markets.
Rising rates contributed to several high-profile bank failures, including that of Silicon Valley Bank earlier this year.
But there are also market experts who don't want the Federal Reserve to act too quickly. The argument: A big rate cut will push a still-hot stock market and other investment vehicles to deeply overbought levels.
The Dow Jones has been overbought for 12 consecutive days, even though it is 500 points below its all-time high of around 36,953.
Cryptocurrency supporters have gained big whenever there have been signs of lower rates. bitcoin was at $43,985 on Nov. 9, up 16% so far in December and 166% on the year after FALLING 64% in 2022.
So Jerome Powell will most likely try not to commit anything on Wednesday, but the twin questions of whether the Fed is done raising rates and starting to cut will be at the forefront.
Some important earnings reports still ahead
Third-quarter earnings season is almost over, but next week will also feature several important earnings reports, including:
Database and software giant Oracle (ORCL) – Get a free report, after closing on Monday. Wall Street expects earnings of $1.05 per share, up from 95 cents a year ago. The stock is up 39% for the year.
Global mining giant BHP Group (BHPLF) – Get a free report and Johnson Controls International (JCI) – Get a free report on Tuesday.
Software giant Adobe (ADBE) – Get a free report after Wednesday's close and the Federal Reserve's announcement. Analysts expect earnings of $3.32 per share, up from $2.78 per share a year ago. The stock is up 81% in 2023 after falling 41% in 2022.
Wholesale Costco (COST) – Get a free report after closing. Earnings of $3.44 are expected, up 11% from $3.10 a year ago. Shares up 33% in 2023. Also reporting: Homebuilder Lennar (LEN) – Get a free report and electronic components maker Jabil Inc. (JBL) – Get a free report.
Darden Restaurants (DRI) – Get a free report, on Friday. The company operates 1,900 restaurants, including Olive Garden and Longhorn Steakhouse. The consensus estimate is $1.71 per share, up from $1.52 a year ago. Shares are up 14.9% in 2023.
