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U.S. stocks were trading near two-year highs on Friday as traders brushed off tough talk from Federal Reserve Chairman Jerome Powell about it being too soon to talk about rate cuts.
Powell, in a speech at Spelman College in Atlanta, said it would be premature to speculate on when policy might ease, while repeating that the Fed remains ready to raise interest rates if needed, as it works to bring inflation down to its 2% yearly target.
While the Fed exerts control over short-term rates, now at a 22-year high in a 5.25% to 5.5% range, it has less direct influence over longer-term rates, which finance corporations, households and reflect the overall health of the U.S. economy.
“The fact that longer rates have come down without the Fed pivoting is supportive of the stock market,” David Kelly, chief global strategist at J.P. Morgan Asset Management, said in a phone call Friday with MarketWatch.
Kelly also thinks inflation is heading down to the Fed’s target, whether central bankers are willing to admit it.
Read: Inflation slows again, the Fed’s preferred price tracker shows
The Dow Jones Industrial Average
DJIA
for November logged its best month since October 2022, while the S&P 500 index
SPX
and Nasdaq Composite Index
COMP
rose the most since July 2022, largely because inflation eased and benchmark borrowing costs for the U.S. economy tumbled.
On Friday, the Dow was trading above 36,000 for the first time since Jan. 13, 2022, and was around 2% off its record close of 36,799.65 set on Jan. 4, 2022. The S&P 500 was near 4,590. If it closes above 4,588.96, it would score its highest close since March 2022, according to Dow Jones Market Data.
Meanwhile, the 10-year Treasury yield
BX:TMUBMUSD10Y
has dropped about 75 basis points in a few weeks, falling to about 4.21% on Friday from a 16-high of 5% in October.
“I think the market is saying we are getting the lower inflation the Fed has been aiming for,” Kathy Jones, chief fixed income strategist, Schwab Center for Financial Research, said in a phone call.
Jones also said the 10-year yield’s brief climb to 5% implied strong economic growth would continue, which now looks less likely. “I do think we can take away that the economy is slowing,” she said, pointing to slowing demand and falling U.S. benchmark crude oil prices,
CL.1,
CL00,
which dipped below $75 a barrel on Friday.
The retreat in 10-year Treasury yields comes as traders increasingly anticipate rate cuts next year, which was reflected on Friday by the odds of a 25 basis point rate cut in March pegged at 60%, according to the CME FedWatch Tool.
“I still think the Federal Reserve is going to be slow to cut rates,” said Kelly at J.P. Morgan Asset Management.
But while that could mean higher short-term rates for longer, markets also will be keeping close watch on 10-year rates, since those more directly impact corporate earnings and can discourage consumer spending, a driver of the U.S. economy.
To that end, Jones at Schwab said the 10-year rate could fall as low as 3.5% next year, if a mild recession unfolds, which isn’t Schwab’s forecast. Kelly said he doesn’t expect the 10-year rate to fall below 4% without the economy first hitting a pothole that triggers recession scares, and several Fed rate cuts.
“Everyone knows someone who is always late for something,” Kelly said. “The Fed is kind of like that.”
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