Fed minutes dampen market enthusiasm

Uncertainty over policy path
U.S. Federal Reserve officials are largely in favor of interest rate cuts in 2024, according to the minutes of the Federal Open Market Committee meeting in December. However, there was “unusually elevated degree of uncertainty” over when — or even if — cuts will actually happen this year.  Still, markets are expecting six quarter-point cuts.

Blow to markets
U.S. markets fell Wednesday, spooked by minutes of the Fed meeting in December, as the 10-year U.S. Treasury yield briefly topped the 4% mark. The pan-European Stoxx 600 ended the day 0.86% lower. Shares of Maersk rose 3.83% on news that freight rates will increase over route diversions, but the gain wasn’t enough to lift the broader index.

Soft landing on track
Richmond Federal Reserve President Thomas Barkin expressed confidence the U.S. economy was on track for a soft landing — that is, a scenario where inflation subsides to 2% or below without causing the economy to contract. However, Barkin sees four risks to the soft landing: growth could reverse; unexpected shocks could occur; inflation might not dip below 2%; high demand could keep prices up.  

Fears of war spreading
Al-Arouri, the deputy political head of Hamas  and six other members of the Palestinian militant group were killed Tuesday. His home in Lebanon’s capital of Beirut was reportedly targeted by a drone strike. Lebanon has claimed Israel is responsible for the blast but Israel has not claimed responsibility for it. The incident has sparked fears the war in Gaza could spread beyond the Palestinian enclave.

[PRO] Hottest stock on Wall Street
One major technology stock is so hot on Wall Street that, in one day, five analysts picked it as their favorite stock. On average, they see the stock having an upside of almost 20%, driven by a strengthening outlook in advertising and artificial intelligence.

The U.S. Federal Reserve hasn’t lost its role as one of the main driving forces for markets.

Last December the Fed put its foot on the accelerator for stocks — perhaps inadvertently — when it announced its projection of three rate cuts for 2024. Yesterday, minutes of that December meeting caused stocks to plummet.

The good news first: Minutes showed Fed officials concluding rate cuts in 2024 are likely.

“Almost all participants indicated that, reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024,” the document said.

But that’s nothing new. We already knew that from the dot plot released last month.

The part that spooked markets: “Participants … reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective.”

Logically speaking, that’s not news to markets, either. “Data-dependent” has been the favorite phrase of the Fed over the past six months. And it’s understandable to say cuts will happen only when inflation’s ebbing.

But the minutes also indicated an “unusually elevated degree of uncertainty” about the path of monetary policy, suggesting even the three cuts aren’t set in stone — although, to be fair, the dot plot is just a projection, not a promise.

Compare that sentiment, however, with the six quarter-point cuts markets are expecting and it’s easy to see why markets reacted the way they did yesterday.

The S&P 500 lost 0.8%, the Dow Jones Industrial Average slipped 0.76% and the Nasdaq Composite fell 1.18%, its fourth consecutive losing day. Meanwhile, yield on the 10-year Treasury briefly crossed the 4% mark as investors fretted over unexpectedly higher-for-longer interest rates.

Jobs data will come out Friday, and data on U.S. consumer price index in exactly a week. Both numbers will not only determine the path of rates, but also where markets go.

— CNBC’s Jeff Cox contributed to this report.