The Stock Market Will Face a Reality Check When the Fed Updates Its Interest-rate Forecasts

This week, U.S. investors are poised for a reality check as Federal Reserve officials unveil their updated forecasts for interest rates. The burning question on investors' minds is whether policymakers maintain their outlook of slashing rates three times in 2024 amidst persistently high inflation, surpassing the targeted 2% mark.

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The preceding week on Wall Street was tumultuous, characterized by volatility spurred by fresh data revealing sustained inflationary pressures throughout February. Investors who had priced in an initial interest-rate cut by June now harbor concerns that the Fed may delay such actions, given the mounting evidence.

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The consensus anticipates the central bank to maintain its policy rate within the 5.25% to 5.5% range following the conclusion of its two-day meeting on Wednesday. All eyes will then turn to the release of the Fed’s latest Summary of Economic Projections, with particular focus on the eagerly awaited "dot-plot." This graphical representation delineates individual policymakers' forecasts for the future trajectory of the fed-funds rate.

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Thierry Wizman, a global FX and rates strategist at Macquarie, suggests that while the Fed is likely to implement easing measures around midyear, the upcoming Federal Open Market Committee (FOMC) meeting might extend the period of observation by one or two more cycles. Wizman speculates that Fed Chair Jerome Powell may reiterate the necessity for "a little bit more" evidence affirming the sustainability of disinflation before considering rate cuts.

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Moreover, Wizman points out that the recent deceleration in the rate of disinflation could prompt Fed officials to revise upwards the median "dot" for 2024 and 2025. According to Wizman's analysis, policymakers had initially projected a cumulative 75 basis points of cuts in 2024 and an additional 100 basis points in 2025 during the Fed’s December policy meeting. However, market sentiment has shifted, with Fed-funds futures traders now converging on the expectation of three quarter-point cuts in 2024, down from initial forecasts of six or seven at the beginning of the year, as indicated by the CME FedWatch Tool.

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Despite mounting concerns over inflation, the stock market has displayed resilience. The S&P 500 reached its 17th all-time high following the February Consumer Price Index (CPI) report, propelling the large-cap index to a 7.3% year-to-date gain. Similarly, the Nasdaq Composite has surged by 6.4% in 2024, while the Dow Jones Industrial Average has recorded a 2.7% increase over the same period, according to data.

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In summary, as investors brace for the Fed’s updated interest rate projections, uncertainty looms over whether the central bank will adhere to its previous guidance of multiple rate cuts amidst persistent inflationary pressures. Despite inflation concerns, the stock market has continued its upward trajectory, indicating a certain level of confidence among investors.

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