MANHATTAN (CN) — Wall Street lost sizeable chunks in equities this week, as investors worry about still-tight monetary policy in 2024 and whether regulators can stick a soft landing to inflationary pressures.
Even news from the Federal Reserve on Wednesday that it would again keep the federal funds interest rate at 5.25% to 5.5% did not cheer investors: Hawkish statements did not foreclose the possibilities of another rate hike before the year’s end, nor the chances of fewer rate cuts next year than anticipated.
The Fed’s pause was not unexpected, but investors were keenly focused on the central bank’s economic projections, which show the central bank’s voting members’ expectations of the economic conditions and predict the federal funds rate over the next couple of years.
In this latest iteration, the Fed forecasts mild economic growth through 2026, which would indicate a soft landing, a term used to describe reducing inflation without causing a deep recession. However, the possibility of more rate hikes and fewer rate cuts in 2024 sent markets tumbling.
Most of the losses came on Thursday, and by the week’s end the Dow Jones Industrial Average had fallen 655 points, while the S&P 500 lost 131 points and the Nasdaq shed 497 points.
“Oddly, the Fed’s attempt to make the case for a soft landing may have increased the odds of a recession,” wrote James Meyer at Tower Bridge Advisors in a Friday investor’s note. “In short, the market’s reaction was proper. … While there are always harbors in the storm, again as noted Wednesday, storm threats increase.”
Analysts also were dismayed by Fed Chair Jerome Powell’s hawkish tone after the announcement. Powell said the central bank has been working to achieve a soft landing to inflation. However, he noted “the worst thing we can do is to fail to restore price stability,” adding that “if you don’t restore price stability, inflation comes back.”
The dot plot also threw some cool water on hopes for a bevy of rate cuts next year, citing an economy that has been too robust.
“Economic activity has been stronger than we expected, stronger than I think everyone expected,” Powell said, adding later, “I think broadly stronger economic activity means we have to do more with rates.”
The Fed meets for the last time in 2023 starting on Halloween, but other central banks already have taken their cues from the Fed. Across the pond, the Bank of England on Thursday also hit the pause button after 14 straight increases to its interest rates. The current rate there matches the federal funds rate: 5.25%, a 15-year high point for England.
Earlier in the week, investors got bad news about housing starts, which fell 11% to their lowest point since May 2020, according to the U.S. Census Bureau. The 1.28 million units built in August below the median forecast of 1.43 million units, but some are hoping it is just a blip due to an underserved housing market.
Fortunately, however, permits increased by 1.5 million, a 6.9% increase over July’s numbers, which experts say suggests single-family construction could rebound later this year.
“The undersupply of single-family homes on the market could provide growth opportunities for home builders,” said Jeffrey Roach, chief economist at LPL Financial. “Especially the companies building entry-level homes for the large cohort of millennials looking to buy.”
The day prior, the National Association of Home Builders’ housing market index also showed a second consecutive drop to hit its lowest point since last April. The index, which surveys home builders about market conditions for the sale of new homes, has been dropping since July after steadily picking up last December.
Roach says the data reflect concerns among buyers and builders about rising interest rates.
“Those households most impacted by high borrowing costs are the ones most likely to wait on the sidelines before purchasing a home,” he said. “The environment could be a good opportunity for new home builders if companies can provide enticing incentives.”
While the economy has thus far been able to avoid a recession, many are concerned about persistent and looming headwinds.
“It’s the strike, it’s the government shutdown, resumption of student loan payments, higher long-term rates, oil price shock,” Powell told reporters Wednesday. “So what we try to do is assess all of them and handicap all of them. And ultimately, though, there’s so much uncertainty around these things.”
The looming government shutdown on Capitol Hill has drawn plenty of headlines lately, but most analysts are not overly worried.
“The chances of a government shutdown this fall are more likely than not, but we think it will have only a slight impact on output,” Nancy Van Houten, lead economist at Oxford Economics, wrote in an investor’s note.
While a shutdown would be poorly timed, arriving when most believe the economy will be shrinking, it would not be catastrophic, she wrote.
“The near-term impact of a delay in government spending could be at least equally as large, but we expect that impact would be mostly reversed after the shutdown ends,” Van Houten wrote.Follow @NickRummell
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