Dow Jones hits an all-time high as investors cheer progress on inflation

The Dow Jones Industrial Average set an all-time high record Wednesday, reflecting new optimism that the economy is slowing just enough to bring down inflation without triggering a recession.

The Dow closed at 37,090, up more than 500 points for the day or 1.4%, surpassing a record in January 2022, fueled by the Fed decision to hold rates steady due to progress on inflation.

The milestone caps off a banner couple of weeks for the U.S. stock market, including the tech-heavy Nasdaq and the S&P 500, bolstered by health-care stocks and promising earnings from technology companies.

The markets have been on a celebratory tear in recent weeks, as signs pile up that the Federal Reserve may be done raising interest rates.

Inflation has come down dramatically since the Fed began hiking borrowing costs since last March to slow the economy from decades-high price growth.

Federal Reserve policymakers see as many as three rate cuts in 2024, the Fed announced Wednesday, although Chair Jerome H. Powell made it clear that interest rate cuts would depend on how the economy is doing.

The last rate hike was in July, and higher interest rates have been cooling the economy in ways that have heartened policymakers.

Inflation has come down dramatically – from last summer’s high of 9.1% to 3.1% in November.

Wage growth is slowing, consumers are spending less, and the job market – while still strong – is moderating to a more reasonable pace.

Economists appear increasingly confident that the Fed can pull off a “soft landing,” by quelling inflation without setting off a sharp rise in unemployment.

“The soft landing is in the bag,” said Claudia Sahm, founder of Sahm Consulting and a former Fed economist.

“Inflation has come down for several months and recession calls are coming off the table. Barring any other catastrophe, the economy has done the impossible.”

Many on Wall Street believe the Fed is done raising interest rates, with markets increasingly hopeful that the central bank might even cut rates as early as next spring or summer.

“Recent history suggests a March 2024 rate cut is happening,” Joseph LaVorgna, chief economist for SMBC Nikko Securities, wrote in a note Monday.

“The futures market agrees,” he added, with investors pricing in a 75% chance that the Fed will slash rates in the first three months of next year.

Fed officials, though, have remained coy about their next moves and have shown little appetite for an imminent reversal in policy.

In remarks this month during an appearance at Spelman College, Powell said the central bank was still moving “carefully.”

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said. “We are prepared to tighten policy further if it becomes appropriate to do so.”

The U.S. economy has proved exceptionally resilient this year, notching quarter after quarter of growth, even in the face of rapid interest-rate hikes.

Although there are signs that Americans are starting to pull back – retail sales dropped slightly in October – many still have extra pandemic-era savings that have allowed them to keep spending.

Even so, Americans are decidedly downbeat about their finances.

The housing market is at a standstill with mortgage rates above 7%, blocking a lot of first-time home buyers and preventing families from sizing up.

Consumer sentiment has fallen for four straight months. Approval of President Biden’s handling of the economy is at the lowest rate since he took office, according to a Washington Post-ABC News poll.

“The consumer is being negatively impacted by interest rates, and that continues to play out,” said Torsten Slok, chief economist at Apollo Global Management.

“Interest rates have gone up, and you’ve started to see more households begin to fall behind on credit card payments, on car loans. Households that are most indebted are getting impacted first.”

The blowback of a slowing economy is hitting Americans in different ways.

Some are still spending big – thanks to a surge in household wealth and savings during the pandemic – while others, on the lower end of the income scale, are having to take on extra debt to cover basics.

Overall job growth has slowed in the past year, from an average of 240,000 new jobs each month to 199,000 in November.

Annual wage growth, at 4% in November, is at its lowest rate in more than two years.

Consumer spending, too, has slowed in recent months, as Americans buy fewer cars and appliances, and pull back on movies and amusement parks.

But so far those shifts have been gradual enough to help curb inflation without cratering the economy.

“This is exactly what the Fed is trying to achieve,” said Slok of Apollo. “The whole reason for raising rates is so you and I buy fewer washers, dryers, cars and iPhones.

“The question is: Is this going to be a sharp slowdown or a milder one? I don’t think anyone knows at this point.”

Even so, recent signs of a controlled slowdown have been enough to buoy markets.

The Standard & Poor’s 500 index and Nasdaq both soared to 2023 highs on Monday, and appear poised to hit all-time records this week.

The latest bump extends beyond the stock market: The price of gold has risen 9% since the start of October, and the price of bitcoin, the leading cryptocurrency, has surged about 50% over the same period, topping $41,000.

While gold isn’t typically a popular investment during a hot stock market, its latest surge speaks to looming fears among consumers, according to Jonathan Rose, a financial consultant and co-founder of Genesis Gold Group.

“People I think are confused about the economy,” Rose said. “When people are confused, a lot take more of a defensive approach, including buying assets like gold and silver to kind of balance out the risks and unknowns.”

Still, some say it’s too soon to declare victory just yet. Inflation is remains far from the Fed’s goal of 2%, and economists say the final stretch is likely to be the toughest and riskiest.

It can take weeks or months for the Fed’s policies to show up in the economy, which means there’s still a chance of a downturn next year.

Jamie Dimon, chief executive of JPMorgan, the country’s largest bank, recently warned Wall Street it should prepare for a recession because “a lot of things out there are dangerous and inflationary.”

Other wild cards also remain: Millions of households began paying back student loans in October, and many more are taking on extra credit card debt to make ends meet.

“It’s still too soon to say we’re out of the woods, but things are moving in the right direction,” said Bernard Yaros, chief U.S. economist at Oxford Economics. “The graceful-disinflation-without-recession scenario we’d hoped for is playing out.”