Fed meeting: Dow ends up slightly after Fed rate decision; Powell says next move unlikely to be rate hike (2024)

Wednesday's Top Reads

U.S. stocks finished mostly lower on Wednesday after Federal Reserve officials cited a lack of progress in getting inflation back to 2% and indicated they would remain highly attentive to the risks of price gains.

"While markets had, once upon a time, expected rate cuts to commence as early as this spring, persistent upside inflation surprises through early 2024 have caused the Fed to delay the start of an easing cycle,'' said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia, which has $138 billion in assets under administration.

"Policymakers are clearly feeling handcuffed by stubbornly high inflation, preventing them from providing the widely anticipated monetary accommodation," LeBas wrote in an email. For markets that had once priced in imminent rate cuts, "this FOMC [Federal Open Market Committee] meeting amounts to a hawkish re-set of expectations."

The Federal Reserve’s policy statement Wednesday was more “dovish” at the margin than markets anticipated, with no hint of a potential interest-rate hike, according to LPL Financial’s Quincy Krosby.

The Fed “offered the market liquidity” with a larger-than-expected slowdown in quantitative tightening “in exchange for more time needed to assess the path of disinflation and timing for initiating rate cuts,” Krosby, chief global strategist for LPL Financial, said in emailed comments Wednesday.

U.S. stocks were rising Wednesday afternoon as Treasury yields fell after the Fed’s statement.

The Dow Jones Industrial Average was up 0.7% heading towards the closing bell, while the S&P 500 rose 0.3% and the Nasdaq Composite gained 0.6%, FactSet data show, at last check.

In the bond market, the yield on the 10-year Treasury note dropped 9.2 basis points to 4.591% based on 3 p.m. Eastern time levels, its biggest daily decline since the start of February, according to Dow Jones Market Data.

Rates on U.S. government debt finished at their lowest levels in a week or more on Wednesday after Federal Reserve Chairman Jerome Powell said a rate hike is unlikely to be the central bank's next move.

The policy-sensitive 2-year rate fell 10.4 basis points to 4.939%, the lowest 3 p.m. Eastern time level since April 24. The 10-year yield dropped 9.2 basis points to 4.591%, the lowest level since April 17.

Federal Reserve Chair Jerome Powell went out of his way to emphasize the next move likely won't be a rate hike, DoubleLine Capital CEO Jeffrey Gundlach told CNBC Wednesday afternoon.

"It seems unlikely that we're going to get three" rate cuts in 2024 as projected in the Fed's dot plot, he said. Based on activity in the inflation market and commodity prices, "I kind of feel like the base case is one rate [cut] for this year," he said. It appears unlikely that a cut would come in June, he added, because "there's just not enough data."

An ETF that launched on Wednesday touts 100% downside protection for investors who hold on to the fund, which is intended to track the S&P 500, for a full year.

It might sound like the financial-markets equivalent of alchemy. But the prospectus for the Calamos S&P 500 Structured Alt Protection ETF – May CPSM offers a relatively simple explanation for how the fund plans to eliminate downside for investors, while still offering exposure to up to 9.8 percentage-points of the S&P 500’s return over the coming 12 months, before the fund’s 69-basis point management fee is factored in.

The fund achieves this mix using a relatively straightforward multileg options strategy. It also comes with an important catch: investors must buy the fund on Wednesday, and hold it for 12 months, to achieve the maximum return, while benefiting from the fund’s 100% downside protection.

Two key elements of the funds’ strategy are high interest rates and the use of so-called “flex” options, both of which help to minimize the cost of the contracts used by the fund.

Here is how the strategy works: first, to try to replicate any advance for the S&P 500 over the coming year, the fund purchases deep in the money “flex” call options set to expire on May 1, 2025.

Stung by sticky inflation, the Fed has crawled back into a wait-and-see mode on interest-rate cuts.

Not that long ago, some top Fed officials suggested rate cuts could come well before inflation slowed to the central bank's 2% target as long as it was decelerating.

Not anymore. Fed Chairman Jerome Powell pretty much said so.

"If we had a path where inflation proves more persistent than expected, and where the labor market remains strong but inflation is moving sideways, and we're not gaining greater confidence, that would be a case in which it could be appropriate to hold off on rate cuts."

Well, guess what? Inflation has proven more persistent in early 2024 than expected. It's even gone up a bit, never mind sideways.

The labor market, for its part, got stronger in the first three months of the year. Wages also rose faster than expected.

The Fed might reduce borrowing costs late in the year, but the central bank needs a lot more evidence that inflation is slowing and the labor market is cooling before it starts signaling rate cuts.

U.S. and global benchmark oil futures settled Wednesday at their lowest levels since mid-March, pressured after U.S. data revealed a 7.3-million-barrel weekly rise in U.S. crude supplies.

Prices extended losses into the day's settlement after Federal Reserve Chair Jerome Powell said it's probably going to take longer for inflation to slow to the point that interest-rate cuts would be justified.

A higher-for-longer rate outlook by the Fed would be “bad for economic-growth prospects, and the rising threat of a recession would be crippling to [oil] demand dynamics,” said Tyler Richey, co-editor at Sevens Report Research, ahead of the Fed's policy announcement.

June West Texas Intermediate crude fell $2.93, or 3.6%, to settle at $79 a barrel on the New York Mercantile Exchange, while July Brent crude lost $2.89, or nearly 3.4%, to settle at $83.44 a barrel on ICE Futures Europe. Both crude benchmarks marked their lowest settlements since March 12, according to Dow Jones Market Data.

U.S. stocks remained higher in the final hour of trading on Wednesday afternoon with the Dow Jones Industrial Average on pace to notch its best daily percentage gain since late March, while the S&P 500 and the Nasdaq Composite were set for their best day in less than a week.

Prices rose moderately as Treasury yields and the U.S. dollar fell in response to the announcement, noted Will Rhind, chief executive officer of GraniteShares, which runs the GraniteShares Gold Trust.

“Inflation numbers have remained elevated and rate-cut expectations for the year have been dramatically adjusted down to just one cut of 0.25% by year-end,” he said. “Given that the economic outlook since the last Fed meeting is now more uncertain, this may be playing out in higher gold prices and more interest in hedge assets such as gold.”

Traders also assessed remarks from Fed Chair Jerome Powell. In a press conference Wednesday afternoon, he said he believes interest rates are high enough to slow the economy and reduce the rate of inflation.

June gold traded at $2,324.40 an ounce in electronic trading, after ending Wednesday’s regular session at $2,311, up $8.10 or nearly 0.4%.

This is a headline. Stay tuned for updates here.