Wall Street Is Betting the Fed’s Rate-Raising Days Are Over, for Now

March 20th, 2019

Money has finally started to chase this year’s stock market rally, which has been driven largely by the Fed’s sharp turn away from last year’s steady rate increases.

Just three months ago, investors were in a panic over the idea that the Federal Reserve might push borrowing costs too high and tip the United States economy into a recession. 

Now, Wall Street is toying with the idea that the central bank could actually be cutting interest rates by the end of the year.

Those forecasts are evident in the market for interest rate futures, where the odds of another interest rate increase in 2019 have fallen to zero, from about 30 percent in December, while the chance of a decrease in rates has risen to more than one in five.

One reason for the changing forecasts? The Fed’s own signal to be more patient as it evaluates whether or not to keep raising interest rates. Since the central bank’s chairman, Jerome H. Powell, first spoke about this newfound patience, stocks have soared more than 15 percent.

“It’s been a night-and-day difference, the outlook for stocks going from December into the first quarter this year,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “And I think you could say that Federal Reserve policy was very important in underpinning the stock market rally.”

The Fed could add more fuel to this rally on Wednesday, when the central bank concludes its latest monetary policy meeting. It is expected to leave interest rates untouched and further emphasize that it is in no hurry to lift them.

The central bank isn’t the only reason that the market is up. Some analysts point toward rising hopes for a United States-China trade deal as helping to lift important technology and industrial shares.

But sectors sensitive to interest rates — small companies for which borrowing costs make up a significant cost, and homebuilders and carmakers whose customers depend on financing — have posted some of the bigger gains in this rally.

Those increases have come even as forecasts for economic growth have shown concern about a slowdown. Economists expect that the United States grew at an annualized pace of less than 2 percent in the first quarter, a slowdown from the 3 percent growth posted in 2018.

And stock analysts have continued to downgrade their expectations for profits this year. Since the end of 2018, full-year profit estimates for companies in the S&P 500 have declined 3 percent, according to FactSet, a financial data provider.

Investors who have so far sat out the 2019 rally, because of concerns about the economy or profits, may be coming around to the idea that it is a mistake to do so when the Fed is so clearly the primary driver of gains.

Last week, more than $25 billion surged into funds that buy American stocks, EPFR data shows.

“It could be that the chase is on,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. “People could be suddenly saying, ‘I’ve got to get involved.’”

Source – NY Times

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