For Wall Street, holding onto the bottom line of "three rate cuts" within the year is victory, and the overnight Federal Reserve decision is undoubtedly a "big victory" for the capital market.
On Wednesday, both gold and US stocks hit historic highs on the same day, while the global market experienced a resurgence of the phenomenon of "the US dollar falling and everything growing". And all of this is because the latest interest rate chart from the Federal Reserve did not adjust the estimated number of rate cuts this year from three to two, as some market participants had previously feared. With the Federal Reserve retaining its guidance to cut interest rates three times within the year, bulls in various asset classes have fallen into an all night frenzy!
From the perspective of the US stock market, Wednesday's sharp rise is quite commemorative. As of the close, the Dow Jones Industrial Average rose 401.37 points, or 1.03%, to 39512.13 points; The Nasdaq rose 202.62 points, or 1.25%, to 16369.41 points; The S&P 500 index rose 46.11 points, or 0.89%, to 5224.62 points.
According to industry statistics, this is the 19th time the S&P 500 index has hit a historic closing high this year.
With the S&P 500 index breaking through the 5200 mark, it is currently about 7.3% higher than the average target price set by Wall Street strategists for the end of 2024 (4861 points). And it should be noted that less than three months have just passed since 2024.
At the same time, the S&P 500 index has risen from 4900 points to over 5200 points, breaking through three hundred point barriers, in a total of only 56 trading days, and its rate of rise is undoubtedly astonishing. Since the low point in October last year, the cumulative increase of the S&P 500 index has exceeded a thousand points.
Of course, Wednesday's level of joy seems to be no less than that of US stock investors, and perhaps there are also gold bulls.
The spot gold price broke through the $2200/ounce mark for the first time in overnight history, reaching a new historical high of $2222.9/ounce.
In the US bond market, as the expectation of the Federal Reserve's interest rate cut rebounds, the yields of various maturity US bonds generally fall from high levels overnight. As of the end of the New York session, the 2-year US Treasury yield fell 8.7 basis points to 4.609%, the 5-year US Treasury yield fell 5.6 basis points to 4.247%, the 10-year US Treasury yield fell 2.2 basis points to 4.274%, and only the 30-year US Treasury yield rose 1.2 basis points to 4.455%.
For many domestic investors who were unable to stay up overnight to pay attention to the Federal Reserve's decision, it may not be difficult to guess the overall "dovish" tendency of the Fed's decision on Wednesday solely from the hot performance of the stock, bond, and precious metal markets mentioned above. Indeed, against the backdrop of persistent stickiness in US inflation in the first two months of the new year, Federal Reserve officials have almost done everything they can to tilt towards a dovish stance on this holiday night - the only stubbornness being to cut off market expectations of more rate cuts in the coming years.
But no matter what, this is already enough to satisfy all market participants.
A Brief Review of the Federal Reserve Resolution: Holding onto the "Three Interest Rate Reductions" within the Year is Victory
As mentioned in our previous look yesterday, the Federal Reserve's monetary policy statement this month has hardly changed compared to January. The only difference between the March resolution text and the January resolution is that the opening "employment growth has slowed down since the beginning of last year, but still strong" has been changed to "employment growth is still strong", and only a few words have been deleted and modified.
This is also the fifth consecutive meeting where the Federal Reserve has unanimously decided to maintain interest rates within the range of 5.25% -5.5% and reiterated that it will wait until it has more confidence in inflation before lowering rates.
There were few changes to the monetary policy statement, which allowed industry insiders to focus more on the latest interest rate chart released at 2am overnight. In terms of predicting interest rate changes at the end of this year, the latest lattice chart released overnight is not without changes, but the good news for the market is that the magnitude of the changes has not changed the position of the median interest rate.
As shown in the figure below, in the dot matrix chart of December last year, 11 officials believed that interest rates should be lowered three times or more this year, and 8 officials believed that interest rates should be lowered two times or less. The comparison between the two sides is 11 to 8. In the latest lattice chart, the number of people who believe that interest rates should be lowered three times or more has decreased to 10, and the number of people who believe that interest rates should be lowered two times or less has increased to 9, which is a ratio of 10 to 9. Therefore, from the perspective of marginal changes, there is indeed an official who substantially raised or lowered the interest rate cut forecast.
In addition, from the distribution of the lattice chart, the predicted value of interest rates has also shifted upwards as a whole. The number of people who believe that interest rates should be lowered four or more times this year has decreased from the previous five to one, indicating that the impulse of officials to lower interest rates is decreasing.
Fortunately, FOMC members still maintain a median expectation of 4.6% for the federal funds rate by the end of 2024. This figure, which remained unchanged in December, obscures the subtle changes in the details of the above dot matrix.
Even though the dot matrix chart still shows that the median expectation for policy interest rates in 2025 and 2026 has been raised to 3.9% and 3.1%, and the median expectation for long-term interest rates has also been raised to 2.6%, due to the distant nature of these predictions themselves, the market's attention is not high.
Other highlights of the resolution day: Is there a significant increase in GDP expectations and a slowdown in balance sheet contraction imminent?
In addition to the most eye-catching interest rate chart that has the most direct impact on the market, the overnight Federal Reserve also has some other key details to change.
In the Federal Reserve's latest economic forecast (SEP), the Fed has raised its forecast for core inflation and economic growth this year. Among them, in the current economic forecast, the core PCE growth rate is expected to be 2.6% and 2.2% by the end of 2024 and 2025, respectively (the forecast for December last year was 2.4% and 2.2%, respectively); The expected real GDP growth rates for 2024 and 2025 are 2.1% and 2.0% respectively (compared to the expected 1.4% and 1.8% in December last year); The federal funds rate is expected to be 4.6% and 3.9% by the end of 2024 and 2025, respectively (compared to 4.6% and 3.6% in December last year).
It is worth mentioning that against the backdrop of both core inflation and economic growth expectations rising this year, the Federal Reserve still holds onto the bottom line of "three rate cuts". This is also why we stated at the beginning of this article that Federal Reserve officials have almost achieved all the dovish bias they can do - since officials are so optimistic about the economy and believe that inflation is not returning to the 2% target so quickly, the median of the Federal Reserve's chart still believes that interest rates should be cut three times within the year. Is this a deliberate attempt by the Federal Reserve to establish a dovish label towards the outside world?
At the press conference after the meeting, there was not much change in the wording and stance of Federal Reserve Chairman Powell compared to his testimony speech on Capitol Hill a few weeks ago. Powell pointed out that the policy interest rate of the Federal Reserve may have reached its peak, and it is appropriate to start relaxing monetary policy at some point this year. He also emphasized as always that if necessary, interest rates will be maintained at a high level for a longer period of time; But if the labor market unexpectedly weakens, measures may also need to be taken.
Powell acknowledged that inflation in the past two months has been more difficult to solve than expected, and warned decision-makers not to "ignore data we don't like". But he said that the latest data "has not really changed the overall situation, that is, inflation is gradually decreasing, but sometimes it goes through some twists and turns, moving towards the 2% target."
Regarding the balance sheet, Powell revealed that officials have discussed the possibility of slowing down the pace of contraction at this meeting, "the general view is that it will soon slow down the pace of contraction."
Powell stated that since the start of balance sheet tightening, Federal Reserve securities have decreased by nearly $1.5 trillion. "At this meeting, we discussed issues related to slowing down the rate of decline in securities holdings. Although we did not make any decision on this today, the committee generally believes that reducing QT will happen soon, which is consistent with our previously announced plan."
How do Wall Street institutions comment on last night's Federal Reserve decision?
Major Wall Street investment banks also expressed their opinions on the overnight Federal Reserve resolution at the first opportunity.
Peter Boockvar, the author of The Boock Report, stated that Powell has clearly shown a dovish bias today, and even a strong labor market will not prevent the start of interest rate cuts. That's why the short-term yield will decrease.
Subadra Rajappa, head of US interest rate strategy at Societe Generale, said that despite strong economic growth and rising inflation, the Federal Reserve still tends to lower interest rates. Investors who believed after last December's meeting that it may be necessary to retract their dovish stance may be very disappointed. The Federal Reserve seems to be focusing on the long-term trend of inflation rather than monthly changes, and if inflation is generally moving in the right direction, they are willing to cut interest rates.
Bill Adams, Chief Economist of Commercial Bank of America in Dallas, stated that the March monetary policy statement stated that the risk of the Federal Reserve achieving employment and inflation targets is approaching a better balance, but they hope to have more confidence in seeing inflation return to target levels before interest rate cuts. This is consistent with Chairman Powell's testimony in Congress earlier this month. The dot matrix does indeed increase the median forecast for 2025, 2026, and long-term federal funds rates, but to be honest, considering the significant uncertainty in the Federal Reserve's actions in the coming months, how valuable are these long-term forecast numbers in the dot matrix? In my opinion, there isn't much.
Sam Millette, Director of Fixed Income at Commonwealth Financial Network, believes that this Federal Reserve statement is only a marginal adjustment and will not have any impact on the market. The situation is basically the same as at the beginning of the year, and it is reasonable for the Federal Reserve to expect a rate cut at some point this year, as economic growth has generally slowed down compared to last year. However, to be frank, the Federal Reserve did respond in some way to the fact that overall economic growth was relatively strong in the first quarter.
Evercore strategist Krishna Guha stated that Powell maintained and continued the Fed's bullish dovish message at the March press conference. An important point is that the current situation is that the Federal Reserve is hoping to cut interest rates - not before it has a responsibility to do so, but as soon as it has a responsibility to do so.
Glenmede's Jason Pride pointed out, "Don't misunderstand, the Federal Reserve still keeps inflation in its sights. Investors should expect interest rate cuts to be the focus, as this could happen in the second half of this year once the Federal Reserve becomes more confident that inflation is approaching its 2% target."
From the expectations of the interest rate market, the industry's confidence in the three rate cuts within the year is becoming stronger after the overnight Federal Reserve decision. Traders' latest pricing shows that the Federal Reserve is expected to cut rates by more than 80 basis points within the year.
Meanwhile, the possibility of the first interest rate cut in June has jumped to 67%!