The Federal Reserve’s pivot to interest rate cuts has sent shockwaves through the market, with investors scrambling to adjust to the potential for lower borrowing costs in the near future. Yields on 3-month and 6-month Treasury bills have remained north of 5% since March, but the Fed’s final meeting of the year saw the central bank opt to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high. However, Fed chair Jerome Powell signaled that a policy pivot to interest rate cuts was likely next year.
Powell’s comments during the meeting helped lift the Dow Jones Industrial Average above 37,000 for the first time ever, with the blue-chip index scoring a third record close in a row on Friday. The swift pace of potential Fed cuts has led to speculation and uncertainty in the market.
As investors continue to grapple with the potential for rate cuts, the market has seen a shift away from “cash-like” assets, with money-market funds experiencing a significant drop in assets over the past week. It remains to be seen how the Fed will orchestrate a pivot to rate cuts if financial conditions continue to loosen.
The uncertainty surrounding the Fed’s potential rate cuts has created volatility in the bond market, as experts expect another year of fluctuating long-term yields. The big driver in bonds will continue to be the yield, with the Fed’s preferred inflation gauge, the personal-consumption expenditures price index, being closely watched to signal the timing of the Fed’s first rate cut of this cycle.
Despite the uncertainty, major U.S. stock indexes logged a seventh straight week of gains, with the Dow, S&P 500, Nasdaq Composite, and small-cap Russell 2000 index all posting gains for the week. The market remains optimistic about the future, but the potential for lower borrowing costs has created a sense of caution and anticipation among investors.