In the early morning of February 1, 2024, the Federal Reserve announced its decision to keep the policy rate unchanged and continue to hold it. These resolutions are in line with market expectations. However, after Fed Chairman Jerome Powell's statement, the three major U.S. stock indexes reversed the trend of the previous few days and appeared. Among them, the S&P 500, which has performed particularly strongly this year, fell sharply by 1 percent at the end of the session42%。
Given that the Fed's interest rate decision is in line with market expectations, what factors have caused Wall Street** to reverse? Fed Chair Jerome Powell indicated that a rate cut in March is less likely, however the market consensus expectation that the Fed will cut rates in March, a difference in expectations that has led to a month-long hike.
Powell's statement
According to the latest data, the US GDP in the fourth quarter of 2023 increased by 33%, and the annual GDP growth rate reached 31%。This result was mainly due to strong consumer demand and the continuous improvement of the situation. Over the past year, the housing market has been somewhat constrained, in large part by rising mortgage rates. The phenomenon of high interest rates has also put some pressure on corporate fixed investment.
The labour market remains tight, but supply and demand are more balanced. In the past three months, the average monthly job creation was 1650,000, well below the previous year's level, but still strong. The unemployment rate remains at 37% low. Job creation remains strong, coupled with an increase in the labor force** – labor force participation has risen further and become more balanced over the past year, especially in the 25-54 age group, and migration has also returned to pre-pandemic levels, further improving the gap between supply and demand in the labor market.
In addition, nominal wage growth moderated and job openings fell. While the gap between jobs and the workforce is narrowing, the demand for labor is still outpacing the available work**.
Inflation has improved sharply from the previous year's level, but remains above the Fed's long-term inflation target of 2%. Combined PCE prices rose by 26% and core PCE prices net of food and energy categories**29%。The level of inflation falling in the second half of last year is reassuring, but Powell said that sustained evidence is still needed to show that inflation is steadily moving towards its long-term target.
The Fed's rate hike cycle began on March 17, 2022, and over the past two years, it has raised its policy rate by 525 percentage points, and a significant increase of more than 1$3 trillion **. The interest rate meeting in January 2024 is the FOMC (Market Open Committee).Keeping interest rates unchanged for the fourth time in a row, but reiterating that it will continue to reduce its balance sheet sharply.
In his statement after the meeting, Powell said: ".We believe that the current policy rate is likely to be at the peak of the current tightening cycle, and that if the economy is broadly developing as expected, it may be appropriate to start easing policy constraints sometime this year. ”This means that the rate hike cycle may be over, and the Fed is likely to start cutting rates sometime in 2024.
"Since the pandemic, the economy has been unexpectedly in many ways, and there is no guarantee that we will be able to meet our 2% inflation target," he added. The economic outlook is uncertain and we remain highly concerned about inflation risks. We are prepared to maintain the current Federal** target rate range for a longer period of time if needed。We know that reducing policy constraints too early or too aggressively could lead to a reversal of the progress we have made on inflation, and ultimately more tightening is needed to bring inflation back to 2%. On the other hand, a late withdrawal of austerity policies or inadequate intervention could undermine economic activity and employment too much. Therefore, in considering any adjustments to the target range for the Federal** interest rate, the Committee will carefully assess the latest economic data, the evolving economic environment, and balancing risks. The Committee believes that it is more reasonable to cut interest rates until the prospects for inflation to remain on track to the 2% target have become clearer。Therefore, the Committee will continue to assess interest rate policy at each meeting. ”
In simple terms,The current high interest rates will continue for a longer period of time, the length of which is uncertain, but likely to be longer than the market expects, which is why Wall Street** fell after Powell's statement after the press conference.
How to view the performance of U.S. stocks in the future
Now that the rate hike cycle is over, the performance of US stocks may fluctuate more around the timing of the Fed's rate cuts and the magnitude of the rate cuts – the pace of rate hikes in the past, and the pace of rate cuts now.
But in the end, what determines the performance of listed companies is their own fundamentals and their ability to withstand pressure in the interest rate cycle.
It should be noted that even if the Fed turns to interest rate cuts, the positive impact of interest rate cuts on all walks of life will not be released in a short period of time, because before the interest rate cut, the longer the high interest rate lasts, the more far-reaching the impact on the industry will be - specifically, under the pressure of high interest rates, enterprises may prolong the investment cycle, delay or even cancel expansion plans, and reduce costs by reducing the scale of operations. They may survive a long cycle of high interest rates, and conversely, companies that are not strong enough in terms of fundamentals and finances may also bend their backs as a result.
However, the negative impact is like a domino effect, when there is a problem in a specific industry, the negative impact will be transmitted to the upstream and downstream, thereby affecting the entire industrial chain, and then affecting the overall economic performance.
For example, Silicon Valley Bank, which crashed and then went into bankruptcy last year, could not withstand the sudden drying up of liquidity and led to a loss of confidence. This year, the New York Community Bank (NYCBUS) appears to be repeating itself, with the bank also reporting its December quarter results on the same day the results were announced, unexpectedly incurring a loss of 2$600 million, far from the market's previous expected earnings, the same ** institution Moody's also downgraded, causing the bank's stock price to fall by more than 37% on the day, which may be related to the high interest rate mortgage interest rate rise, the U.S. housing market is under pressure, which affects the bank's earnings performance.
Therefore,At the beginning of the interest rate cut cycle, the impact of high interest rates is still being released, and the positive impact of interest rate cuts will take a while to be reflected.
For example, after the announcement of the interest rate decision, Google (GooglUS) shares fell not because of interest rates, but because of Google's poor performance in its latest fiscal quarter for the fiscal month.
In the post-rate hike period, the performance will be more volatile, and its own fundamentals will determine its long-term performance.
Author: Mao Ting.