US Stocks Rally as Fed's Beige Book Fuels Rate Cut Bets
Economic activity showed 'little change' and price pressures persisted, but investors seized on signs of a cooling labor market as a signal for looser monetary policy.
Wall Street extended its gains on Wednesday afternoon after the Federal Reserve's latest Beige Book survey depicted a U.S. economy that was 'muddling along,' strengthening investor convictions that an interest rate cut could arrive as soon as next month.
The Dow Jones Industrial Average climbed 1.4%, while the S&P 500 added 0.9% and the Nasdaq Composite rose 0.67% in trading following the report's release. Investors largely shrugged off the report's more cautionary elements, focusing instead on data that could give the central bank room to ease its policy stance.
According to the summary published Wednesday, the Fed's survey of its 12 districts found that overall economic activity had seen 'little to no change' since the last report. Furthermore, the survey noted that while the labor market had cooled, with employment experiencing a 'slight decline,' price pressures continued to increase modestly. Many businesses told the Fed they still intended to raise prices in the coming months, a sign that inflation remains a concern.
Typically, a combination of stagnant growth and persistent inflation would paint a bearish picture for markets. However, traders are increasingly operating under a 'bad news is good news' paradigm, where signs of economic weakness are welcomed as a catalyst for the Fed to stimulate the economy. The cooling labor market was interpreted as the key signal, suggesting the Fed has met its goal of taming wage growth and can now pivot to supporting a slowing economy.
This interpretation sent a clear signal across financial markets. Following the release, the probability of a 25-basis-point rate cut at the Fed's December meeting surged to 84.9%, according to the CME FedWatch Tool, nearly double the odds from a week ago. This sentiment was echoed in the bond market, where short-term Treasury yields, which are highly sensitive to monetary policy expectations, continued their decline.
'The economy muddled along,' economists noted, but for investors, the key takeaway was the mounting evidence that the Fed's next move will be a cut. The report's anecdotal evidence, gathered from business contacts across the country, provides qualitative texture to the recent stream of economic data that has shown a similar loss of momentum.
All eyes will now turn to the Federal Open Market Committee's final meeting of the year in December. While Fed officials have maintained a data-dependent stance, the market has priced in a near-certainty of an imminent policy pivot. The Beige Book, despite its lukewarm assessment, has seemingly given investors the green light to bet on a dovish end to the year.