Key Insights
- Stocks rally in November on increasing hopes Fed could start cutting rates by mid-2024 despite economic uncertainties
- Investors betting on soft landing with inflation easing faster than expected, allowing Fed to reverse policy course
- Lingering worries persist around potential for recession or inflation rebound if Fed acts too slowly
NEW YORK — Wall Street has kicked off a sharp November rally driven by growing conviction the Federal Reserve could start cutting interest rates by mid-2024 amid optimism for a soft economic landing, despite nagging worries inflation may reaccelerate or that monetary tightening could still trigger a recession.
The S&P 500 has surged around 9% this month, on pace for its best single month since July 2022, as trends unnerving investors like a strong dollar and rising Treasury yields reversed. Bets are increasing that an easing Fed could juice stocks following 525 basis points worth of hikes to quell surging prices.
Two key investor assumptions fueled the risk-on shift — faith that cooling inflation lets the Fed begin rate cuts as early as May 2024 rather than staying restrictive for longer, plus hopes resilient data signals the U.S. avoiding severe slowdown.
The possibilities were reinforced by Fed Governor Christopher Waller suggesting rate reductions could come next year if price pressures keep easing. Upbeat Q3 GDP figures also seemed to affirm that growth continues, albeit at a more moderate clip amid reduced consumer and business output.
But dissent persists around declaring victory over inflation or ruling out recession, especially if the Fed acts too slowly on reversing course. While Deutsche Bank penciled in 2024 rate cuts alongside a modest downturn, JPMorgan contends above-average valuations and lingering risks argue for more caution.
For now, easing rate hike expectations helped extend Treasury yield and dollar drops potentially relieving financial conditions. But the Fed’s delicate monetary policy balancing act likely still holds challenges either way.