Antradienis, 21 gegužės, 2024
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The Fed’s Stunning Decision That Triggered a Massive Rally in the Markets

The Federal Reserve delivered a stunning announcement that shook the financial world and markets. Instead of raising the federal funds rate, as many had expected, the central bank kept it unchanged at 5.25%-5.5%. But that was not all. The Fed also signaled a more dovish outlook, projecting three rate cuts in 2024 and four more in 2025. This news triggered a massive rally in the stock market, with the Dow Jones hitting an all-time high of 37,090 and extending its winning streak to five days.

Fed’s Monetary Policy Outlook

The Fed acknowledged that the economy had slowed down, but stressed that the banking system was strong and resilient. The Fed said that the labor market was still healthy, with solid job growth and low unemployment. However, the Fed also noted that inflation had eased over the last year and remained above its 2% target. The Fed reiterated its commitment to its dual mandate of maximum employment and price stability.

The Fed’s projections showed a significant shift in its stance, with a lower expected funds rate of 4.75% by the end of 2024, compared to 5.25% previously. The Fed attributed this change to lower inflation forecasts, reflecting weaker-than-expected inflation data. The Fed’s projections for unemployment and GDP were largely unchanged.


source: tradingeconomics.com

Market Reactions and Sector Performances

The market reacted positively to the Fed’s announcement, with the Dow Jones soaring by 512 points and closing at a record high. The S&P 500 and Nasdaq also posted impressive gains, reaching their highest levels since January. Technology and semiconductor stocks were among the biggest winners, while Home Depot gained 3% on hopes of a housing market recovery.

On the other hand, Pfizer suffered a 6.7% drop as it cut its guidance, leading to a mixed performance among individual stocks.

Home Depot trading strategy
Home Depot trading strategy

Currency and Commodity Movements

The U.S. dollar index fell below 103, reaching its lowest level in more than a week, as the Fed’s decision to hold interest rates steady and forecast 75 basis points of rate cuts for the next year weighed on the greenback. Gold prices jumped to $2,000 an ounce as Treasury yields declined in response to the Fed’s dovish outlook. The market now expects a 62% chance of an interest rate cut in March.

Gold futures price
Gold futures price

Global Implications

The Euro rose above $1.085 against the U.S. dollar, boosted by the Fed’s indication of rate cuts. Investors are now eagerly awaiting the European Central Bank’s (ECB) upcoming interest rate decision, anticipating the ECB to keep rates at record lows and possibly signal future cuts amid a sluggish economy and low inflation in the Eurozone.

Conclusion

The Fed’s decision to keep interest rates unchanged while signaling a dovish outlook has sparked a surge in the financial markets. The shift in monetary policy outlook, along with positive market reactions, suggests a cautious but optimistic mood. As investors digest these developments, the focus shifts to global central banks. Especially the ECB, as they face economic challenges in a dynamic environment.

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