Market Reaction and Economic Data
Following the announcement, bond yields plunged and stock prices soared, reflecting market sentiment. However, economic data released on Thursday demonstrated stronger-than-anticipated retail sales in November. Additionally, there was a smaller-than-expected increase in weekly jobless claims. These reports slightly tempered traders’ enthusiasm for future Fed policy easing.
Despite this data, rate futures markets still indicate solid pricing for potential rate reductions beginning in March. If this scenario unfolds, it would result in the Federal Reserve’s benchmark rate, currently ranging from 5.25% to 5.50%, being lowered to the 3.75% to 4.00% range by the end of next year.
Analyzing the Market Moves
Some analysts view the swift market reactions and the Federal Reserve Chair Jerome Powell’s acknowledgment of possible rate cuts as intentional moves by the central bank to ease financial conditions. They argue that once the market perceives that the Fed has reached the end of its rate hikes, both bond and stock markets rally, regardless of the potential economic outlook.
Citi analysts highlighted, “The Fed is moving aggressively to ease financial conditions.” Similarly, Piper Sandler analysts stated, “Once the market thinks the Fed is done, bonds and stocks BOTH rally, regardless if a recession is ahead or not.”
The market response to the Federal Reserve’s policy meeting included a drop in the yield on the 10-year Treasury note, falling below 4% for the first time in four months. This move nearly reversed the previous increase that followed what now appears to have been the last rate hike by the Fed in July.