Federal Reserve Chairman Jerome Powell has consistently advocated for interest rate cuts throughout the year. However, recent remarks from Fed officials, particularly Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, have introduced uncertainty regarding the timing of these rate cuts.
Kashkari suggested on Thursday that there may not be any rate cuts this year, emphasizing that the decision hinges on the trajectory of inflation. He stated that if inflation remains stable, it raises doubts about the necessity of implementing rate cuts.
The focus on whether and when rate cuts will occur revolves around the Fed’s federal fund rate, which has remained in the range of 5.25% to 5.5% since July 2023. This rate serves as the cornerstone for all interest rates in the United States.
Rising Middle East tensions worry markets
The stock market faced additional complexities due to geopolitical concerns, particularly surrounding reports of potential retaliation by Iran against Israel following an attack in Syria that resulted in the deaths of Iranian military officials.
This geopolitical tension triggered a sudden and significant reversal in the stock market. The Dow Jones Industrial Average, which had initially surged by 294 points, ultimately experienced a sharp decline, ending the day with a loss of over 530 points, or 1.4%, closing at 38,597. This marked the largest one-day point drop since March 22, 2023.
Similarly, the Standard & Poor’s 500 Index and the Nasdaq Composite also registered losses, declining by 1.2% and 1.4%, respectively.
The broader market sentiment was evident in the S&P 500’s performance, which has retreated by 2% since reaching a record closing high on March 28.
Oil prices up, mortgage rates down
Oil prices experienced a notable surge, leading to apprehension about the upcoming U.S. report on Friday. West Texas Intermediate (WTI), the standard benchmark for U.S. crude oil, saw an increase of $1.16, reaching $86.59. This upward trend in prices adds strain to retail gasoline prices, which have climbed by 14% so far this year, reaching $3.567, as reported by AAA.
The possibility of a stronger-than-expected rise in key indicators in Friday’s report could exacerbate the pressure on markets.
In response to the stock market sell-off, there was a noticeable shift towards bonds, leading to a rally in bond prices. Consequently, interest rates saw a decline by the end of the day—indicating a preference among many traders for the safety associated with Treasuries over the riskier nature of stocks. The 10-year Treasury yield decreased from Wednesday’s 4.355% to 4.31%. Additionally, mortgage rates, which had surpassed 7% earlier this year, saw a slight decrease to 6.99%, as reported by Mortgage News Daily.
The conundrum of stubborn inflation
Fed officials are increasingly concerned about the persistent nature of inflation, which has been resistant to decline despite their efforts. The Fed is eagerly awaiting clear indications that inflation is trending towards its target of 2%. If the desired data fails to materialize, they may delay their plans to cut interest rates.
Austan Goolsby, the president of the Federal Reserve Bank of Chicago, expressed particular apprehension about the escalating costs of housing and rents. Despite these concerns, Goolsby still anticipates rate cuts in the future, contingent upon a sustained decrease in inflation. The Consumer Price Index (CPI) inflation, which peaked near 9% in June 2022, moderated to 3.2% in February.
However, Tom Barkin, president of the Federal Reserve Bank of Richmond, emphasized the importance of not allowing inflation to resurface. He believes there is ample time for economic conditions to improve before considering any reductions in interest rates.
In terms of market performance for the day, Paramount Global (PARA) experienced a notable decline of 8.5%, along with Advanced Micro Devices (AMD), which fell by 8.3%. Similarly, chip giant Nvidia (NVDA) saw a decline of 3.44%. On the other hand, GE Aerospace (GE) recorded a gain of 1.2%, while defense contractor Lockheed Martin (LMT) rose by 1.4%.