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Investors uneasy as Fed signals no rate cuts soon

Stocks (^DJI, ^GSPC, ^IXIC) are falling Monday morning as investors grow concerned that the Federal Reserve may not cut interest rates as soon as expected. Falling inflation and a slowing economy had led some on Wall Street to anticipate rate cuts potentially beginning in March 2024. However, recent comments from Fed officials have dampened hopes for an imminent policy pivot.

Yahoo Finance's Jennifer Schonberger analyzes the latest outlook from the Fed regarding monetary tightening, examining whether the central bank is likely to reverse course and begin lowering rates within the next year, or if further tightening is still on the agenda.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: It is the Federal Reserve versus the stock market. Stocks pulling back this morning as doubts creep in over the prospects for a US interest rate cut. Wall Street sees interest rate cuts by next May, with the possibility they happen as soon as March. But that doesn't align with public statements from most Fed officials in recent weeks.

Let's bring in Yahoo Finance's Jen Schoenberger for more on this story. And Jen, there's always this constant push and pull between where the markets are and the Fed is. And the Fed chair last week kind of going out of his way to set expectations.

JENNIFER SCHONBERGER: Yeah, that's right. The Fed is still trying to decide whether they've reached the peak on rates. But Wall Street already pricing in rate cuts as soon as March. Investors betting that falling inflation and the expectation that the economy will slow markedly will cause the Federal Reserve to cut rates.

Take a look at the CME Fed Funds futures this morning. They were pricing in a 53% chance of a rate cut in March. Flip to May. And some are already starting to price in another rate cut on top of that as well. But the Fed may not cut rates as soon as investors think.

Fed officials last week suggested they are intent to hold rates higher for longer. Fed chair Jay Powell tried to warn markets on Friday to no avail that, quote, it would be premature to conclude with confidence that we've achieved a sufficiently restrictive stance, or to speculate on when policy might ease. He said, we're prepared to tighten policy further, if it becomes appropriate to do so. Also, last week, we heard from New York Fed president John Williams on rate cuts, calling them a hypothetical. Something that's far off in the future.

Fed officials worry that if they were to put out language that they are even finished raising rates, or to talk about rate cuts, that could loosen financial conditions, making their fight to bring inflation back down to 2% in a timely manner a much more longer battle. Next week, the Fed widely expected to hold rates steady at their December policy meeting. We will also be getting new interest rate projections. Then, where officials are again expected to signal that they will hold rates higher for longer next year. Back to you.

RACHELLE AKUFFO: And Jennifer, of course, we're going to be looking for that jobs data as well. Anything that looks like things are trending in the right direction. How much harder does this make the Fed's job to keep toeing that line of saying we're not done yet, when markets just don't believe them right now?

JENNIFER SCHONBERGER: Absolutely, Rachelle. If we get another cooler read on jobs data this Friday, something that's in line with a rebalancing in the job market, that will be encouraging for the Fed's inflation fight. But I think you'll need to hear from Powell next week that-- hey, we still need to see more data to make sure that this trend is still intact, that it is not a head fake. The last thing they want is for markets to loosen policy even further, right?

We've seen a backup in the yield on long-term treasuries. The yield on the 10-year coming back down from that 5% level at a very torrid pace. And so, it is up to the Fed officials to continue jawboning, to really try to signal to markets, like, hey, hey guys. These rate cuts are not coming as fast as you think.

RACHELLE AKUFFO: He'll be choosing his words carefully, I'm sure. Our very own Jennifer Schoenberger. Thank you, as always.