Title: Federal Reserve’s Rate Hike Pause Sparks Concerns Over Hawkish Approach on Rate Cuts
Word Count: 379
In its highly-anticipated upcoming meeting, the Federal Reserve is expected to pause rate hikes, offering some relief to markets. However, apprehension looms over the possibility of a hawkish approach towards rate cuts next year. Wall Street fears adverse consequences if the Fed delivers an unfavorable outlook, as indicated by the recent dip below key support levels for the S&P 500 and the 10-year Treasury yield reaching a 15-year high.
While many economists acknowledge the focus on predicting the Fed’s quarterly projections, some argue that this scrutiny has overshadowed the bigger picture of rapidly declining inflation and its potential impact on interest rates. They highlight the paradox of projecting rate increases for 2024, given the current trend of falling core PCE inflation.
Deutsche Bank further adds to the concerns by expecting the Fed to project a surprisingly high 2.6% core PCE inflation for 2024. Such a projection could imply a reversal of the recent inflation trend, along with higher unemployment rates. This outlook, combined with expectations of fewer rate cuts next year, has the potential to negatively impact S&P 500 valuations.
Market participants are eagerly awaiting Fed Chairman Jerome Powell’s news conference, viewing it as having significant market-moving potential. Many anticipate Powell to focus on balanced economic risks, rather than expressing concerns about an economic reacceleration. The current low odds of a rate hike at the upcoming meeting are believed to be on the rise for a quarter-point hike by the end of the year.
The S&P 500 slipping further below its 50-day moving average has heightened concerns regarding a loss of momentum and the potential for a larger pullback. Furthermore, the record-breaking 10-year Treasury yield poses a hurdle for growth stocks. If the Fed does not need to worry about a sharp downturn in economic activity, interest rates could remain higher for a longer period.
Additionally, the Fed’s plan to continue selling bonds accumulated during the pandemic, along with rising deficits and reduced demand from overseas buyers, has contributed to the increase in yields. Experts suggest that a significant economic slowdown might be required to alleviate the pressures created by the current supply-demand backdrop.
As the Fed prepares for its upcoming meeting, the market remains on edge, speculating on the central bank’s stance regarding rate cuts next year. Any indications of a hawkish approach could weigh heavily on the S&P 500 and further impact the 10-year Treasury yield, producing potential headwinds for the economy at large.
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