Fed officials question stock market surge after rate cut projections

Several Federal Reserve officials are urging caution as the financial markets continue to surge over the prospect that the central bank could begin cutting interest rates next year.  

The Fed held interest rates steady for a third consecutive meeting last week and signaled it may have reached an end to its aggressive rate hike campaign.

“We are likely at or near the peak rate for this cycle,” Fed Chair Jerome Powell said at a press conference following the announcement.

While Powell and other Fed officials have said little about the central bank’s plan for next year, all but three members of the Fed panel responsible for setting monetary policy noted in economic projections released Wednesday that they expect at least two rate cuts next year, with the largest share projecting three cuts.

The markets surged on the news, with the Dow Jones Industrial Average surpassing 37,000 for the first time on Wednesday. The Dow has continued to climb since, adding 0.68 percent or about 252 points on Tuesday to close at a record high for the fifth day in a row. 

The other two major indices also remained up nearly one week later, with the S&P 500 adding 0.59 percent and the Nasdaq Composite adding 0.66 percent on Tuesday.

However, some Fed officials suggested the market is being overly enthusiastic. Chicago Fed President Austan Goolsbee, who currently sits on the Fed’s rate-setting panel, said on Monday that he was “confused” by the market reaction. 

“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” Goolsbee told CNBC’s “Squawk Box.” “I was confused a bit with the, was the market just imputing, here’s what we want them to be saying?”

“I thought there seemed to be some confusion about how the [Federal Open Market Committee] even works,” he added. “We don’t debate specific policies, speculatively, about the future. We vote on that meeting. And we voted at that meeting not to raise rates.” 

New York Fed President John Williams similarly told “Squawk Box” on Friday that the panel isn’t “really talking about rate cuts right now” and said it was “premature” to consider what the Fed would decide at its future meetings.

Futures markets are projecting that the Fed will begin cutting rates in March and will make more significant cuts than currently suggested by the central bank’s own projections.

“I think the market, in a way, is kind of reacting very strongly, maybe more strongly than what we’re showing in terms of our projections,” Williams said.

He noted that market reactions to all types of events have been much larger than normal over the last year, pointing to the “uncertainty” and “unusual nature” of the current situation.

Sheila Bair, former chair of the Federal Deposit Insurance Corporation (FDIC), argued that the Fed needs to “strike a more hawkish tone” in order to “offset the irrational exuberance of the markets.”

“There’s a long way to go on this fight,” Bair told CNBC’s “Fast Money” on Thursday. “I do worry they’re blinking a bit and now starting to pivot and worry about recession, when I don’t see any of that risk in the data so far.”

“I do think this is a mistake,” she added. “I think they need to keep their eye on the ball, the inflation ball and tame the market, not reinforce it with this very dovish dot plot.”

The Fed has repeatedly raised interest rates over the past two years in order to tame stubbornly high inflation, which peaked at a 40-year high of 9.1 percent in June 2022. Inflation has eased significantly since, falling to 3.1 percent in November.

However, it remains above the Fed's target rate of 2 percent, and Powell has repeatedly warned in recent months that inflation is still too high despite showing substantial improvement.

“It is far too early to declare victory,” he said at Wednesday's press conference.