By Joy Wiltermuth
The Federal Reserve on Wednesday surprised markets with a fortification of its higher-for-longer stance on interest rates, penciling in only half as many rate cuts next year as had been expected.
Fed officials kept the central bank's policy rate at a 22-year high, but redrew their so-called "dot plot," a chart of the potential path of short-term rates over time, in a less favorable way for borrowers.
The chart now points to two rate cuts in 2024, instead of the four penciled in previously. Any changes matter because the Fed's projections typically are updated only four times a year.
While not set in stone, the new dot plot signals that borrowers shouldn't hold their breath for significantly lower rates as the Fed keeps up its inflation fight, a potentially painful reality check for landlords and Fortune 500 companies needing to refinance soon.
See: A $1.8 trillion wall of corporate debt coming due could cost jobs, Goldman warns
"It's certainly not a snoozer," Sonia Meskin, head of U.S. macro at BNY Mellon Investment Management, said of the Fed's decision to pencil in only two rate cuts next year.
"It depends how corporates handle their refinancing risk," she said, adding that it's an "open question" as to whether higher rates for longer are priced into equity and credit markets.
Major U.S. stock indexes closed lower Wednesday, led by a 1.5% drop in the rate-sensitive Nasdaq Composite Index COMP, according to FactSet. The S&P 500 index SPX fell 0.9% and the Dow Jones Industrial Average DJIA shed 0.2%.
Read: 'Fed hikes are biting harder and harder,' says Apollo economist
Borrowers, from households to landlords to corporations, binged on a mountain of debt available at ultra-low rates over the past decade. The biggest flurry of activity coincided with the Fed slashing the fed-funds rate to a 0%-0.25% range in 2020 and keeping to there until the COVID crisis retreated.
While most homeowners locked in historically low 30-year mortgages, corporations and landlords typically borrow from Wall Street for 10 years or less, resulting in trillions of dollars of debt coming due, likely in a much higher rate environment.
Borrows often default when their cash runs out and they can't refinance.
"The message implied in the dot plot and statement is that the economy is even stronger than was believed in June," said Jake Remley, senior portfolio manager at Income Research + Management, in emailed comments.
"The implication is that the Fed will have to keep their policy restrictive longer than the market may expect."
See: The $1 trillion 'wall of worry' for commercial real estate that spirals through 2027
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09-20-23 1719ETCopyright (c) 2023 Dow Jones & Company, Inc.