Financial markets rallied Thursday as Wall Street grows increasingly confident the economy has achieved a "soft landing" from high inflation without a recession.
The stock market stretched a record-breaking rally into a second day after the Federal Reserve signaled Wednesday that it could begin cutting interest rates next year.
“The Fed believes they have the soft landing in the bag. Clearly, markets believe them now,” Callie Cox, a U.S. investment analyst at eToro, said in a statement.
The Dow Jones Industrial Average was up 92 points — roughly 0.3 percent — just before 1:30 p.m. Thursday after hitting an all-time high Wednesday, surpassing 37,000 for the first time.
The rally began after the Fed announced it would hold rates steady for a third consecutive meeting and suggested it was likely nearing an end to its rate hikes.
The Dow surged 1.4 percent on the news, adding more than 500 points before markets closed Wednesday, while the S&P 500 jumped 1.37 percent and the Nasdaq Composite rose 1.38 percent. All three major indices remained up on Thursday morning.
The celebratory mood on Wall Street reflects a remarkable shift from last year, when most economists were offering dismal projections and largely dismissing the Biden administration’s hopes of a soft landing.
Annual inflation has eased significantly since last summer, when it reached a 40-year high of 9.1 percent. As of November, consumers prices were up 3.1 percent annually, still above the Fed’s 2-percent target but showing a marked improvement over last year.
While the central bank’s aggressive rate hike campaign appears to have helped cool inflation, it has not translated into higher unemployment rates, defying standard economic assumptions. The jobless rate has remained below 4 percent, with the November jobs report showing the rate edged down to 3.7 percent.
The economy has also continued to grow despite widespread predictions of a recession last year, with U.S. gross domestic product (GDP) exceeding 2 percent for the last five quarters.
In the face of the latest positive economic data, Fed Chair Jerome Powell said the central bank is “likely at or near the peak rate for this cycle,” and all but three Fed officials indicated in economic projections released Wednesday that they expect at least two rate cuts next year and a plurality expect three cuts.
“Fed members now see a few rate cuts in 2024, and these seem to be celebratory rate cuts too,” Cox said. “The latest economic projections tell you as much.”
“The Fed lowered their inflation estimates, yet they didn’t change their job market expectations,” she continued. “They expect inflation to come down without a serious spike in unemployment. That’s the definition of a soft landing.”
The Fed adjusted its inflation forecast downward in Wednesday’s economic projections, predicting that annual inflation would fall to 2.4 percent in 2024 and 2.1 percent in 2025, while leaving its unemployment projections largely unchanged.
Nancy Vanden Houten, lead U.S. economist at Oxford Economics, noted that the central bank’s recent communication about its likely course of action on rate hikes “has become decidedly less hawkish.”
“The Fed isn't taking additional rate hikes completely off the table, but its latest set of economic projections and Fed Chair Powell's post-meeting press conference suggest the next policy move will be a rate cut,” Vanden Houten said in a research note.
While Oxford Economics initially anticipated that the first rate cut would occur in the third quarter of 2024, Vanden Houten said the Fed’s economic projections and Powell’s remarks on Wednesday “are sending a message that rate cuts are likely to come sooner than we currently assume.”
However, she added, “We still think the Fed will be patient before lowering rates and is unlikely to move before the middle of the year.”
Cox similarly warned that rates could remain high for a while longer, emphasizing that “nobody has a crystal ball.”
Powell also offered a word of caution on Wednesday, warning that it’s too soon to know if inflation is on track to return to pre-pandemic levels and refusing to rule out future rate hikes.
“We’ve reached a possible inflection point,” Elizabeth Renter, a data analyst at NerdWallet, said in a statement. “The ideal scenario: the economic stars (along with monetary policy) have aligned to produce the soft landing where inflation comes down to 2 percent without a precipitous ascent in unemployment.”
“But we can’t be certain of this yet,” Renter added. “Like so much in the economy, we won’t know how this ends until after it ends.”
Whether the Fed succeeds could have a signficant impact on the 2024 election and President Biden's bid to secure another presidential term.
Despite the sharp drop in inflation and strong economic data, Americans have grown increasingly frustrated with the state of the economy after years of paying inflated prices.
