Stocks shed premarket gains and headed lower on Friday as a Federal Reserve official played down the likelihood that interest rates could be cut soon.
The remarks, by John Williams, president of the New York Fed, highlighted what may be a continued disconnect between markets and the central bank.
“We aren’t really talking about rate cuts right now,” Williams said in an interview on CNBC, adding that it was “premature to be even thinking about” a reduction by March.
An astonishing stretch for the stock market—the
Dow Jones Industrial Average
and
S&P 500
are poised for a seventh straight week of gains—has come amid bets that the Fed will soon cut rates from a generational peak. Investors are expecting cuts because inflation is waning and economic growth is slowing, while the bank signaled Wednesday it may have finished with the series of increases that have taken its target for the fed-funds rate from near zero in March 2022 to 5.25%-5.5%.
The Fed kept borrowing costs unchanged following a meeting of its policy-setting committee held on Tuesday and Wednesday.
But risks remain that markets are getting ahead of themselves. While the “dot plot” summarizing projections among Fed officials revealed a median forecast that rates will sit at 4.6% by the end of next year—amounting to three quarter-point cuts—traders see much more. Prices of interest-rate futures imply odds of greater than two-thirds that the Fed will make its first cut by March, with a 25% chance the central bank will deliver seven quarter-point cuts by the end of 2024, according to the CME FedWatch Tool.
The Dow and S&P 500 shed premarket gains after Williams’ remarks. Both indexes were trading lower.
At some point, market expectations, Fed forecasts, and the actual pathway for rates will have to converge. It’s a well-worn expression on Wall Street that markets can’t fight the Fed, and it certainly seems like traders and the likes of Williams have set themselves up for a tussle.
That looks like a risk for stocks, especially with months to go before the first projected rate-cut in March. Inflation is still far above the Fed’s 2% target.
“One thing we’ve learned even over the past year is that the data can move and in surprising ways,” Williams said. Investors would do well to remember that.
Write to Jack Denton at jack.denton@barrons.com
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