Fed minutes dampen market enthusiasm

Uncertainty in policy direction
Federal Reserve officials generally support a rate cut in 2024, according to minutes from a December Federal Open Market Committee meeting. But there is “an unusually high degree of uncertainty” about when or if the cuts will actually take place this year. Still, the market expects a rate cut of six quarter points.

A blow to the market
U.S. markets fell on Wednesday as the 10-year Treasury yield briefly exceeded the 4% mark, spooked by the December Fed meeting minutes. The pan-European Stoxx 600 ended the day 0.86% lower. Maersk shares rose 3.83% on news that fares would increase due to route changes, but it was not enough to lift the overall index.

Soft landing on the course
Richmond Fed President Thomas Barkin expressed confidence that the U.S. economy is on track for a soft landing, a scenario in which inflation subsides to below 2% without shrinking the economy. However, Barkin sees four risks to a soft landing. Unexpected shocks may occur. Inflation rate he is likely not to fall below 2%. High demand can cause prices to rise.

spreading fear of war
Hamas’s deputy political leader al-Arouri and six other members of the Palestinian militant group were killed on Tuesday. His home in the Lebanese capital Beirut was reportedly the target of a drone attack. Lebanon says Israel is responsible for the explosion, but Israel has not claimed responsibility. The incident has raised concerns that the war in Gaza could spread beyond the Palestinian enclave.

[PRO] Most Popular Stocks on Wall Street
A major technology stock has gotten so much attention on Wall Street that five analysts named it their favorite stock in one day. On average, they expect stocks to rise by nearly 20% due to stronger advertising and artificial intelligence prospects.

The US Federal Reserve has not lost its role as one of the main drivers of the market.

Last December, the Fed perhaps inadvertently put its foot on the gas for stocks when it announced its outlook for three rate cuts by 2024. Yesterday, minutes from that December meeting caused the stock price to plummet.

First of all, the good news. Minutes showed that Fed officials are likely to conclude a rate cut in 2024.

“Nearly all participants agreed that baseline forecasts suggest that it is appropriate to lower the target range for the federal funds rate by the end of 2024, reflecting the improved outlook for inflation,” the document said. “I showed that.”

But it’s nothing new. We already knew that from Dotplot, which was released last month.

The part that surprised the market was that “participants believed that it was appropriate for policy to maintain a suppressive stance for some time until inflation fell clearly and sustainably toward the Committee’s goal.” This is the part that says, “I have reconfirmed this.”

Logically speaking, it’s nothing new to the market either. “Data-dependent” has been the Fed’s favorite phrase for the past six months. And it makes sense that interest rates would only be cut when inflation recedes.

But the minutes also show an “extraordinary rise in uncertainty” about the direction of monetary policy, suggesting that even three interest rate cuts are not set in stone – although, to be fair, , the dot plot is just a prediction, not a promise.

But when you compare that sentiment to the 6 quarter point rate cut the market is expecting, it’s easy to see why the market reacted the way it did yesterday.

The S&P 500 fell 0.8%, the Dow Jones Industrial Average fell 0.76% and the Nasdaq Composite fell 1.18%, falling for the fourth day in a row. Meanwhile, the yield on 10-year government bonds briefly exceeded the 4% mark as investors worried about an unexpected rise in long-term interest rates.

Employment data will be released on Friday, and US consumer price index data will be released in exactly a week. Both numbers not only determine the direction of interest rates, but also the direction of the market.

—CNBC’s Jeff Cox contributed to this report.