What happens to stock markets if the Fed doesn't lower rates in 2024?

“Where will interest rates go in 2024?” This is the question that worries the investing public and that keeps the various asset classes of the entire financial market in check.
“The economy is resilient” – and this is the consideration that, strangely, worries the market, leading some experts to exclude the possibility of imminent reductions in rate levels.
However, not everyone is convinced by this observation; indeed, the futures market expresses a very low possibility (equal to 1%) that the Fed will keep rates in the current range at the end of 2024.
Even Powell himself does not exclude the possibility of cuts during the year, and the latest data regarding the Core PCE Price Index seem to indicate a stabilization of the inflation rate in the United States, just as recent data from France highlight a linear decline in consumer prices also in some regions of Europe.
Faced with these considerations, what makes sense to expect from the monetary policy of Western countries and, consequently, how could the stock markets react to this choice? Core PCE in line with expectations, what to expect from the Fed and the ECB? The recent data shared by the various international statistical agencies provide a particularly difficult economic picture to interpret.
According to estimates from the S&P Global Rating, US GDP is expected to be +2.5% in 2024, and data linked to inflation until yesterday suggested an unsuitable scenario for lowering rates.
And it is on the basis of these considerations that the stock markets have moved, discounting a slight, but emotionally significant, growth in the yields of debt securities.
A reality which, however, only after a few weeks, seems to have once again been called into question by one of the data most evaluated by central banks to set their monetary policy strategies, the Core PCE, shared on March 29, in contraction compared to the previous one.
0.5%, and in line with the analysts' forecast of 0.3%.
This in fact fuels the stock market public's hope of being able to witness the first interest rate cuts as early as 2024.
Evidence, the latter also shared by data from European statistical agencies, with France proposing a contracting inflation rate – returning to the minimum levels of 2021 – and which could stimulate the ECB to consider, even in upcoming press conferences, to put the topic of "rate cuts" on the table.
Powell himself, president of the US Fed, has, on the occasion of the latest meetings, left some clues to journalists regarding possible cuts in 2024, unlike the president of the ECB, Christine Lagarde, who has also always shown herself more reluctant to disclose certain expectations, highlighting a certain discrepancy between the statements of the two central bankers.
What emerges from Powell's recent statement? During Jerome Powell's conference on March 29, some interesting references emerged, also regarding recent economic data.
The president outlined two lines of thinking: cutting rates too soon would be harmful, but at the same time, waiting too long could do damage to the economy and the job market.
In essence, he did not rule out a cut, but he did not show any particular rush in doing so either, expressing a strong interest in making the right decision anyway, but above all in doing so at the right time.
A look at the bags.
Where does this market confidence come from? Close attention will be paid to the consumer price index for March, which will be published on April 10, but in the meantime, the stock markets seem to have chosen to continue their upward push, showing a lot of confidence in the monetary policy decisions of the central banks.
It is not yet clear what the next move of the Fed and the ECB will be, but it is clear that the stock markets are of little interest, at least until a possible "rate increase" is once again questioned, given that companies have so far proven to be able to maintain a solid and profitable financial structure even at current interest rates, probably thanks to the boost that came with the popularity of artificial intelligence.
This is until the next mass debt maturities, scheduled for 2025 and 2026.
In essence, the risk could arise with the establishment of two scenarios: the hypothesis of an increase in rates returns, or the idea truly consolidates of a "higher for longer", at least until the end of 2025.
Greater attention, however, seems to need to be paid to the bond sector, a section also mathematically linked to the size and expectations on the size of interest rates.
Interest rate futures markets, however, have no doubts about the underlying direction: the probability that rates will end 2024 in the current range is less than 1%; so despite recent bond depreciations, the market expects at least one pullback this year.
If this were the case, with the progressive realization of the idea of a lowering of rates over the course of the year, the bonds could appreciate again, in the face of a natural decrease in their rate of return.