• The Federal Reserve is set to announce its latest monetary policy decision at 2pm ET Wednesday, followed by a press conference with Fed Chair Jerome Powell.
• Markets are fully expecting the central bank will hold rates steady for the third-straight time as it continues to review data outlining the impact of the previous 11 rate hikes.
• Fed officials agree that inflation has not yet hit the central bank’s 2% target and that interest rates, which are at their most elevated level in 22 years, need to stay “higher for longer” in order to bring prices down.
• However, markets are expecting the central bank to start cutting rates as early as the first quarter of next year — a point that the Fed is unwilling to concede, for now. That means investors will be listening closely to any sign from Powell that Fed officials have made any determination on a rate cut timeline.

People walk past the New York Stock Exchange on December 11 in New York. 

Stocks were higher Wednesday morning as investors awaited the Federal Reserve’s final policy meeting of the year.

Dow futures were up 45 points, or 0.1%. S&P 500 futures rose 0.1%. Nasdaq futures were 0.2% higher.

Investors largely expect the central bank to hold rates steady. 

Markets also chewed over the latest Consumer Price Index, which showed prices rose 3.1% for the 12 months that ended in November, a slight decline from the 3.2% annual rate recorded for the month prior, according to Bureau of Labor Statistics data. On a monthly basis, the gauge rose 0.1% from October. Economists had expected prices to stay flat over the month and for the annual rate to ease to 3.1%, according to LSEG.

Investors are awaiting the Producer Price Index, due at 8:30am ET Wednesday, which is the last economic data the Fed will mull over before it announces its policy decision for December.

Federal Reserve Chair Jerome H. Powell speaks during a news conference at the Federal Reserve in Washington, on November 1.

The Federal Reserve is expected to announce Wednesday that it will keep its key interest rate steady at a 22-year high for the third time in a row. Central bank officials will also release a fresh set of economic projections, likely showing inflation cooling faster than previously estimated and an additional rate cut next year, or more.

The Fed’s post-meeting statement could also suggest that the central bank isn’t leaning toward hiking again, specifically by nixing the usual “additional policy firming” phrase, though that change could also come at a future meeting.

Fed Chair Jerome Powell is expected to throw some cold water on the possibility of rate cuts beginning in just a few months, reiterating that more hikes remain on the table. He tried doing so earlier this month.

“Having come so far so quickly, the [Fed] is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” Powell said during a discussion in Atlanta. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”

But any additional rate increases aren’t reflected in futures. Stocks rallied after Powell’s hawkish comments in Atlanta. Indeed, investors are already looking ahead to the Fed cutting rates sometime next year, but when rate cuts begin remains unclear. Markets are currently pricing in a roughly 40% chance of that first rate cut coming in March.

The Fed lowers its key federal funds rate for two main reasons; because unemployment is rising due to a weakening economy, or simply because there is no reason to keep interest rates elevated at a “restrictive” level, if it’s clear that inflation is under control. In the latter scenario, with inflation slowing and rates unchanged at a high level, that would mean that inflation-adjusted, “real” interest rates are rising, unnecessarily constraining the economy.

Titans of finance have been warning for months that looming geopolitical dangers are the biggest threat by and large to the US economy. But even as wars rage on in the Middle East and Eastern Europe, markets have been enjoying an end-of-year rally.

The S&P 500 reached its highest level since January 2022 on Tuesday, following new data that showed cooling inflation. The surge came even as the Israel-Gaza war intensified and the Russia-Ukraine war approached the end of its second year.

It appears that, for now, Wall Street is skeptical of the impact of war on the US economy and is instead more focused on the Federal Reserve and inflation rates than conflict abroad.

JPMorgan Chase CEO Jamie Dimon has repeatedly said that geopolitical uncertainty is currently the biggest risk in the world.

He stressed, at last month’s New York Times DealBook Summit, that this may be the most dangerous time the world has seen in decades, and that the wars in Ukraine, Israel and Gaza could have far-reaching impacts on global energy, food supply, trade and geopolitics. It could even, he said, lead to nuclear blackmail (using the threat of nuclear warfare as leverage to coerce another country into meeting certain demands).

He’s not alone. EY’s latest CEO Outlook Pulse survey found that 99% of CEOs said they were shifting their investments in response to geopolitical challenges.

Violent conflicts abroad pose the largest threat to markets next year, according to a Natixis survey of 500 institutional investors from around the world.

“The biggest macroeconomic risk for 2024 is geopolitical bad actors who with one action can upset economic and market assumptions globally,” the group wrote. That risk ranked above policy errors by central banks, a slowing Chinese economy and dwindling consumer spending.

But the S&P 500 is up by 9% since Hamas’ October 7 attack and up 10% since Russia’s full-scale invasion of Ukraine in February 2022.

“Many armchair forecasters bid up hysteria regarding the ongoing war in Ukraine and the October 7 terrorist attack in Israel,” wrote Marko Papic, chief strategist at the Clocktower Group, in a note this week. “In the end, neither event had any impact on markets.”

Instead, investors appear locked in on the Fed — and investors aren’t going to let geopolitics get in the way of their holiday cheer.

“With geopolitical tensions elevated in the world, I think it’s very important that we don’t conflate the very muted response that we’ve seen, say over the last four to five weeks, with markets being very sanguine, because they’re not,” said Sinead Colton Grant, incoming chief investment officer at BNY Mellon, at last month’s Reuters NEXT conference in New York.

“They’re watching the evolution very, very closely and there’s an assumption that all these events remain fairly contained. Should that turn out not to be the case, you will see markets react quite sharply, and that would reverberate beyond the equity markets,” she said.

Fed officials’ latest economic projections, released in September, showed that they will begin to lower interest rates some time next year. But it remains unclear as to when rate cuts will ultimately begin and how many times the Fed will cut in 2024. Economists’ estimates around rate cuts vary.

“The Fed is feeling increasingly comfortable that the economy, jobs and inflation are all moving in the right direction, consistent with the current federal funds rate,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.

“But futures markets are anticipating a lot of cuts next year, beginning in March. That’s probably overly aggressive from the Fed’s point of view, so Powell may try to guide markets back to less aggressive rate cuts next year,” he said.

Whether a deteriorating economy or inflation’s defeat elicits rate cuts next year is anyone’s guess.

And with markets already sending clear signals on rate cuts, Fed officials might be discussing that during their ongoing policy meeting, which began on Tuesday.

“Powell is going to get asked whether or not they discussed rate cuts at this meeting, and that’s going to be one of the hardest things for him to navigate,” Diane Swonk, chief economist at KPMG, told CNN.

“We’ll see it in the minutes, but he has to admit if they did. He’s pretty good at corralling the cats ahead of time, so my guess is that he says he will hold off on any rate cut discussions until January,” she added.

It’s also not just Powell pooh-poohing the rate cuts discourse.

“I’m not thinking about rate cuts at all right now,” San Francisco Fed President Mary Daly told a German newspaper last month. “I’m thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability.”

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on November 1 at the Federal Reserve in Washington, DC.

Investors are feeling bullish that the Federal Reserve will begin to cut interest rates in the first half of next year, despite Fed Chair Jerome Powell and other officials saying they’re not considering rate cuts just yet.

Still, some think rate cuts could come as early as the first quarter.

The Fed has kept rates steady for periods of time before beginning to cut. At one point, the Fed held its benchmark lending rate steady for more than a year starting in the summer of 2006.

But if the predictions of a March cut bear out, or even a rate cut in May, so much for the Fed’s higher-for-longer strategy.

“Now we’re moving into higher-for-long-enough,” Diane Swonk, chief economist at KPMG, told CNN in an interview.

But why would the Fed begin to cut rates so soon, if some officials, including Powell himself, have said it’s still way too early?

Investors point to the Fed’s own mantra of being data dependent. Markets are calling the Fed’s bluff when it comes to any additional hikes.

The last time Powell said more hikes remain on the table — during a discussion in Atlanta earlier this month — stocks rallied as markets took Powell’s hawkishness in stride.

“Powell is incentivized to maintain that hawkish bias until the last second, and they will do more if they need to, but it comes down to the data and the data suggests that they don’t need to do any more,” Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, told CNN.