Key Insights
- Fed leaves rates unchanged at 5.25-5.5% range; Powell signals end likely near for rapid rate hikes
- Stocks surge with Dow seeing best close since January 2022, S&P 500 and Nasdaq hit fresh peaks
- Dovish shift welcomed by markets interpreting Fed is nearing final stage of inflation fight
The US Federal Reserve’s historic monetary tightening campaign appears to have reached its peak, sparking a rally in stocks as investors cheered the prospect of rates topping out.
On December 13th, the Fed left interest rates unchanged for the third straight meeting, keeping its benchmark rate anchored between 5.25-5.5% after a blistering series of jumbo hikes over the past year intended to tame inflation.
Crucially, Fed Chairman Jerome Powell signaled the end is likely near for rate rises, barring an unexpected surge in prices. The Fed forecasts rates falling back in 2024 as inflation continues cooling from its torrid pace earlier this year.
Markets Breathe Sigh of Relief
Financial markets reacted euphorically to this pivot, with US stocks surging over 1% across the board. The iconic Dow Jones benchmark saw its best close since January 2022, capped by a 512 point leap. The S&P 500 and tech-centric Nasdaq also carved fresh 2022 peaks.
The rally was broad-based across sectors, underscoring conviction that the Fed’s restrictive stance has contained inflation risks without tipping the economy into recession. Investors are betting rates remain near their apex through 2023 before retreating.
As Powell asserted, the Fed is adamant on not making the grave mistake of overtightening and sparking an economic contraction – a message welcomed by market participants. The combination of stable rates and receding inflation points to a soft landing ahead.
Of course, variables remain. An unforeseen reacceleration in prices or persistent inflation could force additional Fed action. But for now, a remarkable year of historically steep rate hikes is culminating with markets optimistic that the firehose of liquidity draining monetary policy shifts into neutral gear going forward.