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Fed Keeps Rates Steady, Infers 3 Rate Cuts in 2024

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Today’s biggest stock market-affecting news was not in the form of an economic print ahead of the opening bell — in today’s case, Producer Price Inflation (PPI) — but in the Fed announcement that interest rate levels will remain where they’ve been since mid-summer: 5.25-5.50%. In just 10 minutes following the release of the Federal Open Market Committee (FOMC) statement, The Dow jumped +200 points, the S&P 500 nearly +30, the Nasdaq close to +100 points and the small-cap Russell 2000 more than +25.

A cursory glance at the headline would suggest a head-scratcher: why? We already knew the Fed was done raising rates. Why should stocks jump so high on news that was already anticipated by the market? The answer may be in the inferred interest rate cuts: by the end of 2024, Fed members on average expect the Fed funds rate to come down three 25 bps moves. At between 4.50-4.75%, we may see a blossom in economic activity that we haven’t seen since the Fed decided to start raising rates back in March of 2022.

In fact, we may have already started to see it: the 10-year bond yield has now sunk to 4.03% — a level not seen since a short blip in early August of this year (the 2-year is also down, but to 4.44%, so don’t expect the inverted yield curve to solve itself anytime soon). This could provide a boon to mortgage markets with pent-up demand for existing housing finally coming onto the market, among other things.

In Jerome Powell’s press conference following the FOMC release, the Fed Chair acknowledged that inflation remains too high — with the path forward still yet uncertain. As such, the Fed is proceeding carefully going forward (the next FOMC meeting will be January 30-31), and said “no one is declaring victory (over inflation) — that would be premature.” That said, he also acknowledged that economic recession projections from as recently as September have come way down in the past few months.

According to the Fed, 2% inflation won’t arrive here until 2026. That’s certainly enough time to conclude that perhaps a higher threshold for an optimum inflation rate should be considered. To date, Powell has firmly focused only on 2%, and it would likely take a deep recession or decaying employment levels for the Fed to make this determination. Thus far, the FOMC plan to drain inflation from the economy — while getting a late start — has done an excellent job.

Adobe (ADBE - Free Report) shares are trading down -6% in after-hours following its fiscal Q4 earnings report release… which was positive, with beats and raises for both top and bottom lines. Earnings of $4.27 per share outpaced the $4.13 in the Zacks consensus, while $5.05 billion in quarterly sales bested the $5.01 billion, +12% year over year.

Guidance for next quarter is for EPS of between $4.35-4.40 on revenues between $5.10-5.15 billion, compared to $4.24 per share and $5.09 billion, respectively. But this sort of sell-off is still what can happen to a company that has notched +85% gains year-to-date. Investors are booking some profits here late in the year.

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