The Federal Reserve begins its March meeting on Tuesday. On Wednesday, the central bank will release not only its latest decision on interest rates but also the latest Summary of Economic Projections from FOMC officials. Those projections include officials' estimates for where rates will be in the coming years.
A few months ago, they may have led to a big selloff on Wall Street, but that may not be the case anymore. Yahoo Finance's Josh Schafer explains why in the video above.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Stephanie Mikulich.
Video Transcript
[AUDIO LOGO]
SEANA SMITH: The Fed's March meeting is beginning tomorrow. We will get the decision on Wednesday. Investors anticipating what we are going to hear from Fed Chair Jerome Powell and what he's going to say about the economy given the resilient econ data that we have gotten out over the last several weeks. We want to bring in Yahoo Finance's Josh Schafer who has been closely following that and more so. Josh, lay it all out for us.
JOSH SCHAFER: Yeah. I would say perhaps the biggest risk to the markets this week or maybe catalyst, if you will, to the markets over the next couple of days could be essentially this dot plot showing that the Fed might cut less this year. One of the key risks that some economists are flagging just overall would be it takes just two Fed officials to move their projection for us to go from a median projection of three cuts this year to a median projection of two cuts. This given how we know the expectation for Fed rate cuts has moved markets in the past.
Remember the rally we saw in December when we expected more cuts. It could be considered an overall risk to stocks here. We're sitting still close to record levels. We haven't had a 2% sell off and over 4 months now. So people have-- it feels like some people might be waiting for a reason to sell. We've been talking a lot about that over the past couple of weeks. And it just hasn't come. Maybe the dot plot could be this. But I will say, guys, I've been talking to some strategists about this.
And there are some people that say, maybe we don't see a sell off just one Fed rate cut getting taken off the table. And maybe overall, the story doesn't change that much when you zoom out.
BRAD SMITH: You have a lot of the chief investment officers that have been taking note at least of the amount of positions that are moving into cash. Does this move that dial one way or another, if we see the Fed come out and say something that the markets disagree heavily with?
JOSH SCHAFER: Yeah. Brad, it'd be interesting because you'd think moving into cash would make sense when you're going to expect rates to be higher for longer. So maybe you continue to see that theme, which would be against some of the bull thesis that we see out there with-- there's a lot of people sitting in cash, at some point they're going to want to allocate. Well, maybe not if the Fed doesn't cut it all this year. Maybe you just stay at your 5% rate and play it safe.
But I think another interesting dynamic that was explained to me over from the team at Bank of America just in terms of if the Fed doesn't cut. Beauvais said that that doesn't really change their 5,400 call on the S&P 500, which I found pretty interesting. And they pointed out that if the Fed doesn't cut or even if we see this dot plot move to two cuts, that likely comes with an upgrade to the GDP forecast. We know the economy doing well is obviously good for companies. So at a high level, we can understand how that might be good.
And then overall just at this point, we're talking about 50% basis point cut, 75% basis point cut. Some people are just saying, when you think about the overall cap structure of these large companies, it's not going to matter that much. And the additional stat that Bank of America likes to point out, which is quite interesting, 75% of the S&P 500 is currently in long term fixed debt. That would mean they're not coming back to market to refinance at these high levels.
So even if interest rates are still high, the companies aren't going to see it the same way the companies-- a lot of companies haven't fully seen it yet. So maybe they're still in a good position and it doesn't really change that earnings story because the economy is going to do well. So maybe even if we get a sell off on this dot plot, maybe it's not fully time to panic on the year.
SEANA SMITH: Yeah, exactly. And that also just goes to the fact that this narrative that we've been talking about now this whole debate about whether or not the market's being a bit too optimistic about the rate cuts that they are expecting three before year end. It doesn't really matter in the grand scheme of things. And that has been largely the story that we are hearing more and more from strategists. And even economists in terms of the longer term story and what we are going to be talking about six months, 12 months from now is not so much hinging on these three rate cuts between now and the end.
It's just the whole calculus, I think, has started to change in terms of what exactly that means, the overall impact, and whether or not it's going to have a material impact in the performance more broadly.
JOSH SCHAFER: We went from six rate cuts priced in the market rallying on that.
SEANA SMITH: And we're still on that.
JOSH SCHAFER: To three. And stocks kept rallying through that. A lot of people were talking about it. Seems like the last week getting worried about these rate cut expectations, worried about these rate cut expectations. We just slashed them in half for a month and a half and hit new highs in every index.
SEANA SMITH: The market hears what it wants to hear.
BRAD SMITH: And it's the pacing or the timeline of those rate cuts actually coming to fruition too. I mean, it seems like for the analysts or the economists out there, they put that on themselves, they have their own year-end goals too that they have to report back.
[INTERPOSING VOICES]
JOSH SCHAFER: The July debate is going to start after this meeting. It'll be fun.
BRAD SMITH: I can't wait to get your flip-flops ready. Josh, thanks so much for taking the time. Appreciate it.
