Fed officials question stock market surge after rate cut projections

Several Federal Reserve officials are urging caution as financial markets continue to rally on the prospect that the central bank could begin cutting interest rates next year.

The Federal Reserve held interest rates steady for a third straight meeting last week and signaled it may have reached the end of its aggressive rate-hike campaign.

"We are likely at or near the top rate of this cycle," Federal Reserve Chairman Jerome Powell said at a news conference following the announcement.

While Powell and other Fed officials have said little about the central bank's plan for next year, all but three members of the Fed panel responsible for setting monetary policy signaled in economic projections released Wednesday that they expect at least two rate cuts next year, with the Most projecting three cuts.

Markets soared on the news, with the Dow Jones Industrial Average surpassing 37,000 points for the first time on Wednesday. The Dow Jones has continued to rise since then, adding 0.68 percent or about 252 points on Tuesday to close at a record high for the fifth day in a row.

The other two major indexes also remained higher nearly a week later, with the S&P 500 up 0.59 percent and the Nasdaq Composite up 0.66 percent on Tuesday.

However, some Federal Reserve officials suggested the market is being overzealous. Chicago Fed President Austan Goolsbee, who currently sits on the Fed's rate-setting panel, said Monday that he was "confused" by the market's reaction.

“It's not what you say or what the president says. It’s what they heard and what they wanted to hear,” Goolsbee told CNBC’s “Squawk Box.” "He was a little confused with the fact that the market was just imputing, is this what we want them to say?"

“I thought there seemed to be some confusion about how [Federal Open Market Committee] “It even works,” he added. “We do not discuss specific policies, speculatively, about the future. We voted on that meeting. And at that meeting we voted not to raise the rates.”

New York Fed President John Williams similarly told "Squawk Box" on Friday that the panel is "not really talking about rate cuts right now" and said it was "premature" to consider what the Federal Reserve would decide at its future meetings.

Futures markets project that the Federal Reserve will begin cutting rates in March and will make more significant cuts than the central bank's projections currently suggest.

"I think the market, in some ways, is reacting very strongly, perhaps more so than we're showing in terms of our projections," Williams said.

He noted that market reactions to all types of events have been much greater than normal over the past year, pointing to the "uncertainty" and "unusual nature" of the current situation.

Sheila Bair, former chair of the Federal Deposit Insurance Corporation (FDIC), argued that the Federal Reserve needs to “adopt a more aggressive tone” to “counteract irrational exuberance in the markets.”

"There's a long way to go in this fight," Bair told CNBC's "Fast Money" on Thursday. "I'm concerned that they're blinking a little bit and now starting to pivot and worry about a recession, when I don't see any of that risk in the data so far."

"I think this is a mistake," he added. "I think they need to keep an eye on inflation and monitor the market, not reinforce it with this very dovish dot plot."

The Federal Reserve has repeatedly raised interest rates over the past two years to rein in persistently high inflation, which hit a 40-year high of 9.1 percent in June 2022. Inflation has slowed significantly since then, falling to 3.1 percent in November.

However, it remains above the Federal Reserve's target rate of 2 percent, and Powell has repeatedly warned in recent months that inflation remains too high despite showing substantial improvement.

"It's too early to claim victory," he said at Wednesday's press conference.