Fed's steady outlook boosts market's hopes for smooth economic soft landing

Fed outlook boosts market: The US stock market, riding high at record levels, received a reassuring message from the Federal Reserve as it maintained its projections for rate cuts in 2024 despite stronger-than-expected economic growth.

For weeks, signs of robust economic expansion and persistent inflation had tempered market expectations regarding the extent of rate cuts by the US central bank, even as stock prices continued to climb steadily.

However, Federal Reserve Chairman Jerome Powell's remarks on Wednesday underscored the Fed's confidence in its outlook, affirming that while economic indicators pointed to strength, the Fed anticipated continued easing of price pressures. 

The central bank maintained its projection of a total of 75 basis points in rate cuts for 2024, signalling its commitment to achieving an economic “soft landing.”

Jason Draho, head of asset allocation Americas for UBS Global Wealth Management, commented, “This is a Fed that wants to cut rates and believes inflation is coming down and will continue to come down.”

Despite some lingering investor scepticism regarding the Fed's ability to deliver on its rate cut projections, Wednesday's market response was positive. 

The S&P 500 and Nasdaq Composite both ended higher, with the former hitting a new closing high. Additionally, the yield on the benchmark 10-year Treasury moved lower.

The Fed's acknowledgment of the economy's strength, coupled with an upgraded forecast of 2.1% expansion in 2024, resonated with investors' expectations for an economic soft landing. 

A recent survey by BofA Global Research revealed that 62 per cent of fund managers anticipated such a scenario.

Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, noted, “I think markets love that notion that (the Fed) is willing to let inflation run a little bit hot, that they're willing to have growth re-accelerate.”

However, concerns lingered among some investors regarding the Fed's ability to execute its projected rate cuts, given the robustness of the economy and persistent inflation. 

Views have shifted, with futures markets now pricing in a potential rate cut in June instead of March as previously expected.

Eric Vanraes, head of fixed income at Eric Sturdza Investments, expressed scepticism about the Fed's forecast of three rate cuts, highlighting discrepancies with the current economic conditions.

Overall, while the Fed's projections suggest a cautious approach to rate cuts, investors remain watchful for further confirmation of the central bank's easing trajectory before adjusting their investment strategies.

(With Reuters Inputs)