The Dow Jones Industrial Average hits an all-time high, reflecting optimism about interest rate cuts
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The Dow Jones Industrial Average hit an all-time high on Wednesday, reflecting new optimism that the economy is slowing just enough to reduce inflation without triggering a recession.
The Dow closed at 37,090 – up more than 500 points, or 1.4 percent, on the day – surpassing a record set in January 2022, boosted by the Fed's decision to keep interest rates stable due to progress on inflation. The milestone caps a few weeks for the U.S. stock market, including the tech-heavy Nasdaq and the S&P 500, supported by healthcare stocks and promising gains from technology companies.
Markets have enjoyed a celebratory rally in recent weeks as signs mount that the Federal Reserve may be ready to raise interest rates. Inflation has fallen dramatically since the Fed began raising borrowing costs last March to slow the economy amid decades of high price growth. Federal Reserve policymakers now expect up to three rate cuts in 2024, the Fed announced Wednesday, although Chairman Jerome H. Powell made clear that rate cuts would depend on how the economy performs.
“We will look at the totality of the data,” he said in a press conference on Wednesday. “Growth is one thing. The same applies to inflation. This also applies to the labor market data. … We would look at the total as we have it. We make decisions about future policy changes. …We’re going to look at all of these things.”
The last rate hike was in July, and higher interest rates have cooled the economy in a way that has encouraged policymakers. Inflation has fallen dramatically – from last summer's peak of 9.1 percent to 3.1 percent in November. Wage growth is slowing, consumers are spending less and the job market, while still strong, is slowing to a more reasonable pace. Economists appear increasingly confident that the Fed can pull off a “soft landing” by curbing inflation without triggering a sharp rise in unemployment.
“The soft landing is in the bag,” said Claudia Sahm, founder of Sahm Consulting and a former Fed economist. “Inflation has been falling for several months and calls for recession are off the table. Unless another catastrophe occurs, the economy has achieved the impossible.”
Many on Wall Street now believe the Fed is done raising interest rates, and markets are increasingly hopeful that the central bank could cut rates as early as next spring or summer.
“Recent history suggests there will be a rate cut in March 2024,” Joseph LaVorgna, chief economist at SMBC Nikko Securities, wrote in a note on Monday. “The futures market agrees,” he added, with investors betting on a 75 percent chance the Fed will cut interest rates in the first three months of next year.
However, Fed officials remained cautious about their next steps and showed little interest in an impending policy reversal. In remarks this month during an appearance at Spelman College, Powell said the central bank was still taking a “cautious approach.”
“It would be premature to conclude with confidence that we have reached a sufficiently hawkish stance or to speculate about when policy might be eased,” Powell said. “We are prepared to further tighten the policy if it seems appropriate.”
Of the 30 companies included in the Dow Jones, the biggest percentage gain on Wednesday came from Walgreens, which rose 7.4 percent. The S&P 500 rose 1.37 percent and is up 22 percent year-to-date. The Nasdaq closed with a gain of 1.38 percent.
The U.S. economy has proven exceptionally resilient this year, growing quarter after quarter despite rapid interest rate hikes. And while there are signs that Americans are beginning to pull back — retail sales fell slightly in October — many still have extra pandemic-era savings that have allowed them to continue spending.
Yet Americans are decidedly depressed about their finances. The real estate market is at a standstill and mortgage rates are above 7 percent, blocking many first-time home buyers and discouraging families from spending larger. Consumer sentiment has fallen for four months in a row. Approval of President Biden's handling of the economy is at its lowest level since he took office, according to a Washington Post-ABC News poll.
“The consumer is being negatively impacted by interest rates, and that continues to have an impact,” said Torsten Slok, chief economist at Apollo Global Management. “Interest rates have increased and we are seeing more and more households defaulting on credit card payments and car loans. The most indebted households are affected first.”
The setback of a slowing economy is hitting Americans in different ways. Some are still spending big – thanks to a surge in household wealth and savings during the pandemic – while others at the lower end of the income scale are having to take on additional debt to cover essentials. Overall job growth slowed last year, from an average of 240,000 new jobs a month to 199,000 in November. Annual wage growth was 4 percent in November, its lowest level in more than two years.
Consumer spending has also slowed in recent months as Americans buy fewer cars and appliances and retreat from movie theaters and amusement parks. But so far these changes have been gradual enough to curb inflation without destroying the economy.
“That’s exactly what the Fed wants to achieve,” Apollo’s Slok said. “The whole reason rates are increasing is so that you and I will buy fewer washers, dryers, cars and iPhones. The question is: will it be a sharp slowdown or a milder one? I don’t think anyone knows at this point.”
Nevertheless, recent signs of a controlled slowdown have been enough to give markets a boost. The S&P 500 index and the Nasdaq both rose to 2023 highs on Monday and appear to be on track to hit all-time records this week.
The recent surge goes beyond the stock market: Gold prices have risen 9 percent since the beginning of October, and the price of Bitcoin, the leading cryptocurrency, has risen around 50 percent to over $41,000 in the same period.
According to Jonathan Rose, a financial advisor and co-founder of Genesis Gold Group, gold is not typically a popular investment during a hot stock market, but its recent rise reflects looming fears among consumers.
“I think people are confused about the economy,” Rose said. “When people are confused, many take more of a defensive approach, including purchasing assets like gold and silver to offset the risks and unknowns.”
Still, some say it is too early to declare victory. Inflation remains far from the Fed's 2 percent target, and economists say the final leg is likely to be the toughest and riskiest. It could take weeks or months for the Fed's policies to be reflected in the economy, meaning there is still a chance of a downturn next year.
Jamie Dimon, CEO of JPMorgan Chase, the nation's largest bank, recently warned Wall Street to prepare for a recession because “a lot of things out there are dangerous and inflationary.” Other wildcards also remain: millions of households have began paying off their student loans in October, and many more are taking on additional credit card debt to make ends meet.
“It's too early to say we're out of the woods, but things are moving in the right direction,” said Bernard Yaros, chief U.S. economist at Oxford Economics. “The gentle disinflation-without-recession scenario we were hoping for is coming to fruition.”
Rachel Siegel contributed to this report.
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