Stocks Inch Closer to Record as Fed Signals Willingness to Cut Rates - The New York Times

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Stocks Inch Closer to Record as Fed Signals Willingness to Cut Rates

Expectations that the central bank would begin to cut interest rates this year have been fueling a stock market rally all month.

By Matt Phillips

June 19, 2019

Stocks edged higher Wednesday, after the Federal Reserve indicated that a growing number of the central bank’s policymakers now expect to cut interest rates this year.

The central bank held rates steady, but the indication about a future cut seemed to confirm the view of investors, who in recent weeks had become increasingly certain the Fed would act this year to counter economic headwinds related to the trade war.

“The Fed is moving in the direction of what the market is pricing,” said David Lefkowitz, a senior strategist at UBS Global Wealth Management. “I think the market is satisfied that there’s some movement in their direction.”

After the interest rate announcement, the S&P 500 finished the day up 0.3 percent. Defensive sectors such as health care and utility stocks, businesses that hold up well during periods of weak economic growth, led the market’s gains.

The Fed’s decision made a larger splash in the bond markets, where yields on Treasury bonds tumbled. The yield on the 10-year Treasury note — a key gauge for a range of consumer borrowing rates — fell to 2.03 percent at 3 p.m., its lowest closing level of the year.

The movement of interest rates indicated that the Fed’s afternoon announcement had made bond market investors more confident of coming rate cuts. A number of bond market analysts pointed to the projections showing that several members of the rate-setting committee now expect rate cuts this year. In March, the last time such indications were released, none of the participants expected the Fed to cut rates in 2019.

“Officials now are projecting cuts or lower rates this year, whereas previously they were expecting rates to be just about flat,” said Jonathan Cohn, a bond market strategist with Credit Suisse in New York.

Wednesday’s drop in Treasury yields continued a worldwide push lower in government bond yields, as investors have moved their money away from riskier investments and into the relative safety of bond markets. They’ve made the move, in part, because of growing concern that the trade tensions between the United States and China could derail global economic growth. (Bond prices and bond yields move in opposite directions, so when investors buy bonds, it pushes yields down.)

At times this year, similar concerns have roiled stock markets. Worries about trade were at the heart of last month’s 6.6 percent tumble for the S&P 500. That sell-off lost steam, in part after reassurances from the Fed this month that it stands ready to act to sustain the decade-long economic expansion.

Markets have quickly moved to price in the rising probability that the Fed will lower rates. In May, the Fed funds futures market was placing roughly 20 percent odds on a rate cut at its monetary policy meeting in July. Those odds jumped to nearly 70 percent in early June. By the end of trading on Wednesday, the market was putting odds of 100 percent on a July cut, according to Bloomberg data.

Growing expectations of cuts have helped fuel a sharp rebound in stocks this month. The S&P 500 is up 6.3 percent in June, and the broad index of blue-chip American companies is approaching a new high.

The S&P 500 is now less than 1 percent below its high of 2,945.83, which it reached on April 30. Through the end of Wednesday, the stock market is up more than 16 percent in 2019.

“It’s not ripping because economic data is good,” said Nancy Davis, chief investment officer at Quadratic Capital Management in Greenwich, Conn. “It’s all because of central banks.”

Read more about the markets, the trade war, and the Fed:

The Trade War With China Has an Upside for Consumers, Too

June 17, 2019