Investors cheered the Federal Reserve’s forecast on Wednesday that it would begin lowering interest rates next year. The news sent stock prices sharply higher and Treasury yields plummeting.
The S&P 500 rose 1.4 percent after the Fed released its projections for where the economy and interest rates would be by the end of 2024. The rally left it less than 2 percent below the high that was recorded at the start of January 2022, just before fear of higher rates sent the stock market tumbling. The Dow Jones industrial average, viewed as a barometer of the economy because it includes big manufacturing companies that tend to be more sensitive to the economic cycle, also rose 1.4 percent, to a new high.
In a positive sign for the broader market, the Russell 2000 index of smaller companies, which also tends to follow the ebb and flow of the domestic economy, rose 3.5 percent.
“The market loves it, that’s for sure,” said Lauren Goodwin, an economist at New York Life Investments, after the Fed’s economic projections were released.
The Fed’s rapid rate increases since March 2022 have sent shock waves through financial markets, raising borrowing costs on things like mortgages and government debt and weighing on the stock market.
On Wednesday, the Fed appeared to confirm something investors have come to expect for a couple of months: Its campaign of raising interest rates is at an end. A sustained slowdown in inflation, bringing it closer to the central bank’s target, has become clearer in recent months. At the same time, continued resilience in the broader economy has meant investors haven’t had to worry as much about the downside of high borrowing costs.
Fed officials forecast roughly three rate cuts of a quarter-point each next year, more than they predicted when the Fed met back in September.
The two-year Treasury yield, which is sensitive to changes in interest rate expectations, moved abruptly in response to the Fed’s projections, sliding more than a quarter of a percentage point to around 4.4 percent, its biggest one-day decline since the banking crisis in March.
Analysts are now split on where the market will go from here. Some caution that with growth waning, and inflation still yet to slow fully to the Fed’s target of 2 percent, rate cuts may be needed to prop up the economy, rather than just to adjust to slower inflation.
“It’s my expectation that we will see growth continue to slow, and if the Fed is cutting, they are cutting a lot and quickly,” said Ms. Goodwin.