Investors certainly love the Fed’s soft landing

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The Fed called it a day on Wednesday – the US economy has had a soft landing.

Chairman Jerome Powell resisted making big statements at the news conference, telling the assembled press bluntly: “We are not declaring victory.”

But new forecasts from the central bank, showing that Fed officials expect further declines in inflation, no sharp rise in unemployment, moderation in economic growth and a 0.75% interest rate cut next year, send a clear message.

Unsurprisingly, investors love this news.

The euphoria in markets on Wednesday was largely driven by the last element of this forecast, with the Fed’s latest “dot chart” suggesting three interest rate cuts of 0.25% each in the coming year. All other things being equal, low interest rates are positive for risk assets.

But these expected lower interest rates do not come with the baggage that often encourages a central bank to ease its policy stance, which represents a downturn in the economy.

Instead, the Fed expects next year to be, for the most part, a repeat of what Powell called the “remarkable performance” of the US economy.

Inflation is now expected to fall to 2.4% by the end of next year, slightly above the Fed’s 2% target. Unemployment is likely to rise, but to only 4.1% from 3.7% recorded in November. As of October, the unemployment rate was 3.9%.

While growth should moderate from 2.6% to 1.4% between 2023 and 2024, Powell took pains to point out in Wednesday’s press conference that this year’s economic expansion was “a surprise to almost everyone.”

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The Fed expects inflation to slow, interest rates to fall, and growth to moderate next year.

Together, these forecasts suggest that the Fed is reinforcing its view that it will deliver a “soft landing” during this economic cycle, thus offering investors all of the good things (low interest rates) and none of the bad (mass layoffs). and higher financing costs).

The Dow Jones Industrial Average (^DJI) closed at a record high on Wednesday.

The small-cap Russell 2000 (^RUT) rose more than 3%.

The Nasdaq Composite (^IXIC) is now up 40% for the year.

Even bonds rose, too, with the yield on the 10-year Treasury note on Wednesday continuing its rapid decline toward 4% after reaching a 16-year high of 5% just two months ago.

Add to that the rally we’ve seen in cryptocurrencies over the past month as Bitcoin (BTC-USD) surpassed $45,000, a drop in oil prices that will bolster consumers’ balance sheets, and a rebound in dozens of stocks that investors left for dead during the 2022 washout.

Just over a month ago, we similarly highlighted the wealth of ways in which financial markets offer investors the opportunity to make money with a nod to the defining economic phrase of 2023: We’re back.

In Fed Powell’s view, not only are we back, but we are here to stay.

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