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Dow surges to new record as Fed signals three rate cuts in 2024

What we covered here

  • The Federal Reserve said Wednesday it is holding its interest rate steady and could cut rates at least three times next year.
  • Wall Street celebrated the end of almost two years of aggressive rate hikes.
  • Markets rose sharply, with the Dow closing at a record high.
  • The S&P 500 was up 1.4% and the Nasdaq gained 1.3%.
4:13 p.m. ET, December 13, 2023

Dow reaches record high as Fed pivots toward rate cuts

Traders react as a screen displays the Fed rate announcement on the floor of the New York Stock Exchange on December 13. Brendan McDermid/Reuters

US markets soared higher on Wednesday afternoon following the Federal Reserve’s final policy decision of the year.

The Dow rose 1.4%, closing at 37,090.24 and blazing past its previous record high of 36,799.65, reached nearly two years ago.

The S&P 500 was up 1.4% and the Nasdaq also gained 1.4% as Wall Street celebrated the US central bank’s announcement that it would keep interest rates steady after almost two years of aggressive rate hikes — and that it expects three rate cuts in 2024.

Wednesday’s stock surge sent the Dow’s year-to-date gains to about 12%. The S&P 500 is also about 2% from a record high and is up 22.6% so far in 2023. The tech-heavy Nasdaq Composite has soared more than 40% so far this year.

“The major takeaway from the December policy meeting is that the Federal Reserve is forecasting a soft landing, full employment and intends to reduce its federal funds policy rate by at least 75 basis points in 2024 to support the ongoing business expansions,” wrote Joseph Brusuelas, chief economist of account firm RSM, in a note Wednesday.

“From our vantage point that is about the best holiday gift a central banker can bestow upon the investment community, policymakers and the public,” he wrote.

4:08 p.m. ET, December 13, 2023

Powell spoke a lot about a "neutral" and "natural" rate of interest. Here's what the terms mean

US Federal Reserve Chairman Jerome Powell holds a press conference at the end of Monetary Policy Committee meeting in Washington, DC, today. The Reserve voted Wednesday to hold interest rates at a 22-year high for the third straight meeting and signaled it expects to make three cuts next year. The Fed's decided to keep its benchmark lending rate between 5.25 percent and 5.50 percent. Brendan Smialowski/AFP/Getty Images

A lot of people listen to Federal Reserve Chair Jerome Powell for clues about where interest rates will go in the future. But on Wednesday Powell spoke a lot about lesser-known kinds of interest rates: the neutral and natural.

"Neutral" and "natural" rates of interest are often used interchangeably, but they refer to the same concept.

The term dates back to 1898 when Swedish economist Knut Wicksell wrote: “There is a certain rate of interest on loans which is neutral in respect to commodity prices and tends neither to raise nor to lower them.”

In other words, there’s a Goldilocks interest rate out there. One that isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. In theory, that perfect rate exists in the real world. And it’s likely the missing puzzle piece needed for the Fed to achieve a soft landing, where inflation is tamed but a recession is avoided.

But as Powell pointed out, it's really difficult to uncover in practice.

When asked by a reporter on Wednesday if he thought there were "significant structural shifts" in the economy post-pandemic, he said it's hard to know, but "one that comes to mind .... is the question of where the neutral rate of interest is."

"If it's risen — and I am not saying that it has — but if it were to have risen, that would mean that interest rates would need to be a little bit higher to convey the same level of restriction," Powell added.

3:25 p.m. ET, December 13, 2023

Why the Fed may start cutting rates before inflation falls to its 2% target

The Fed predicts interest rates will be considerably lower at this point next year than they are right now, signaling three rate cuts may be in the cards for 2024.

But the Fed also expects inflation won't return to its target 2% rate until 2026. So why cut rates, which could boost the economy (and inflation along with it) before inflation gets back down to the Fed's comfort zone?

Since rate hikes take time to work their way into the economy, waiting until inflation reaches 2% may mean the Fed could keep rates too high for too long, potentially tipping the economy into a recession, said Fed Chair Jerome Powell.

"The reason you wouldn't wait to get to 2% to cut rates is that policy would be too late," Powell said Wednesday at a post-meeting press conference. "It takes a while for policy to get into the economy, affect economic activity and affect inflation."

4:16 p.m. ET, December 13, 2023

What a Fed rate cut could mean for you

People consider a car on display in a dealership in Highlands Ranch, Colorado, in February 2022. David Zalubowski/AP

Since March of last year, the Federal Reserve has raised its benchmark interest rate 11 times for a cumulative (and scorching) increase of 5.25 points.

After several months of enduring the highest rates in 22 years, the central bank signaled that three rate cuts could be on the horizon in 2024.

That could have a significant effect on people’s everyday lives: Specifically, borrowing will get cheaper, making it more bearable to buy a home or a car, wrangle credit card debt, or to finance that new furnace or business expansion.

The federal funds rate serves as the basis for banks' prime lending rates. If those go lower, money goes further for consumers and businesses if they need to finance purchases.

Some of the most immediate effect could be felt on short-term loans, including adjustable-rate mortgages and credit card rates.

At a time when the average credit card interest rate has soared north of 24% and credit card balances have ballooned, lower rates will be welcomed by many, said Joe Brusuelas, chief economist at RSM.

"Lower interest rates across the spectrum [will help] sustain the business expansion and will directly create conditions whereby beleaguered consumers will see direct relief," he told CNN in an interview.

However, it also means that the United States soon will move past "peak savings rates," he said.

"One should expect that the risk appetite will return both to markets and households, who will then look at moving money out of CDs and savings accounts into more risky equity positions," he said.

3:20 p.m. ET, December 13, 2023

Why is spending in a slump? "Maybe people just bought too much stuff," Powell says

Shoppers browse appliances inside a Best Buy store on Black Friday in Union City, California on November 24. David Paul Morris/Bloomberg/Getty Images

Although consumer spending had remained reasonably robust throughout the year, Americans have largely pulled back on discretionary items. Revenge travel was so 2022. Treadmills, big TVs and home goods are out.

But that doesn't necessarily mean the economy is in bad shape. It just means that consumers are taking a pause after they loaded up on items during the pandemic, Fed Chair Jerome Powell said at a press conference Wednesday.

"Maybe people just bought so much stuff that they temporarily don't want any more stuff; they haven't got anyplace to put it," Powell said.

3:14 p.m. ET, December 13, 2023

Interest rates are high. These are the best places to park your cash

Nopphon Pattanasri/iStockphoto/Getty Images

For the third time in a row, the Federal Reserve on Wednesday decided not to raise (or lower) its key interest rate. Consequently, the Fed’s benchmark lending rate will remain at its highest level in 22 years.
Given that the Fed influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy, savers and people with surplus cash still have many opportunities to get a far better return on their money than they’ve had in years — and even more importantly, a return that outpaces the latest readings on inflation.

Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.

Read more here.
3:01 p.m. ET, December 13, 2023

Dow reaches new intraday high after Fed decision

The Dow Jones Industrial Average reached an all-time intraday high on Wednesday afternoon after the Federal Reserve announced that it would keep interest rates steady — and that it expects three rate cuts in 2024.

The Dow rose past 37,000 during Fed Chair Jerome Powell's press conference, beating its previous all-time intraday high of 36,952.65 reached in January 2022.

However, because of the way market highs are recorded, this is not considered a record for the index. That would occur if the Dow ends the day above its previous record close of 36,799.65, also reached in January 2022.

3:10 p.m. ET, December 13, 2023

Powell isn't ruling out a recession. "No one is declaring victory"

Federal Reserve Board Chair Jerome Powell speaks during a news conference about the Federal Reserve's monetary policy at the Federal Reserve, Wednesday, December 13 in Washington. Alex Brandon/AP

While it may seem like the Federal Reserve has pulled off the miraculous task of bringing down inflation without causing a recession, Fed Chair Jerome Powell said the central bank hasn't crossed the finish line yet.

Powell said he's confident the economy isn't currently in a recession but "there's always a probability that there will be a recession in the next year."

There's a lot of uncertainty about the economic outlook with inflation above the Fed's 2% target, and the full effects of the central bank's cumulative rate hikes that kicked off last year have yet to be felt across the economy.

Even though inflation has been cooling down without a significant spike in the unemployment rate, there's no guarantee that will continue, Powell told reporters in a post-meeting press conference on Wednesday. "No one is declaring victory."

3:39 p.m. ET, December 13, 2023

The Federal Reserve's actions this year have had a powerful impact on housing

An aerial view shows a subdivision that has replaced the once rural landscape on July 19 in Hawthorn Woods, Illinois. Scott Olson/Getty Images

The Federal Reserve's actions this year had a powerful impact on housing in the United States.

The four quarter-point rate hikes between February and July of this year saw lingering inflation concerns stoke Treasury yields, sending them higher and dragging mortgage rates higher, too.

Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed's actions, what the Fed actually does and investors' reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow. While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them.

The average rate for a 30-year, fixed-rate mortgage hit its lowest level this year at the beginning of February, at 6.09%. February saw existing home sales grow as buyers took advantage of mortgage rates that were lower than at the end of 2022.

But as mortgage rates have trended higher from February's low for the year, home sales have dropped every month since, falling from a seasonally adjusted annualized rate of 4.55 million in February to 3.79 million in October, the most recent monthly data. And that crushing sales volume has been because of high mortgage rates.

Mortgage rates crossed over 7% in August, reached a high for the year of 7.79% in October and have come down since.

High rates also factor in to the exceptionally low inventory of homes to buy, another reason there are so few homes sold. Homeowners who bought or refinanced into ultra-low rates in the 2%, 3% or 4% range between 2020 and the beginning of 2022 are unwilling to sell and face buying a home at a much higher interest rate.

The housing market is looking for inflation to come under control, which will bring mortgage rates down. Analysts anticipate mortgage rates to fall moderately in 2024. A forecast from the National Association of Realtor's chief economist, Lawrence Yun predicts the average rate for 2024 will be 6.3%.