Dow Jones Hits Record High as Interest Rates Set to Fall
The Federal Reserve, in a recent decision, announced that it will keep interest rates unchanged. This marks the third consecutive occasion where the rate has remained steady. The current federal funds rate lies between 5.25% and 5.5%, and the decision aligns with the easing inflation rate and a stable economy. Notably, the Federal Open Market Committee, which was unanimous in its decision, forecasts at least three interest rate cuts in 2024, potentially in quarter-percentage-point increments. This projection is slightly less ambitious than market expectations, which anticipated four cuts, but more assertive than earlier indications by officials.
Historical federal funds rate chart. Source: Federal Reserve Bank of New York
Market at All-Time Highs
The markets, having anticipated this decision, reacted positively. The Dow Jones Industrial Average surged over 400 points, briefly breaking the 37,000 mark.
Dow Jones Chart. Source: TradingView
The S&P 500 also hit a record high today, when adjusted for dividends. See below:
Source: TradingView
What’s Next?
Looking ahead, the committee's projections suggest additional rate cuts in the coming years, aiming to reduce the federal funds rate to between 2% and 2.25% by 2026.
In a statement, the committee indicated a potential end to rate hikes, mentioning that any further policy tightening would consider multiple factors. This is a new addition to their language, hinting at a cautious approach moving forward.
The Federal Reserve has also been reducing its bond holdings, allowing up to $95 billion a month to roll off its balance sheet. This process is part of their policy tightening, and there's no sign of it slowing down.
The backdrop of these decisions is an improving inflation scenario. Inflation rates have decreased from the 40-year high reached in mid-2022. Federal Reserve Chair Jerome Powell commented on this positive trend, noting the reduction in inflation without a significant rise in unemployment rates. The Fed expects core inflation to gradually decline over the next few years, aligning with their 2% target by 2026.
Recent economic data supports this trend, with both consumer and wholesale prices showing little change. The Federal Reserve is close to meeting its 2% inflation goal, with some calculations suggesting it could reach a 2% annualized rate over six months.
The overall economic growth has slowed down, with GDP expected to grow around 2.5% for the year. The Federal Open Market Committee has slightly adjusted its growth projections for the upcoming years, expecting a 2.6% growth in 2023 and a stable unemployment rate.
While the Federal Reserve remains open to increasing rates if inflation rises unexpectedly, officials currently prefer a cautious approach, observing the impact of their previous decisions on the U.S. economy.
