US interest rates may remain high if stocks keep soaring

Fed's goal of a low-inflation future threatened by excessive exuberance in financial markets

- Jeff Sommer

It isn't much of a stretch to claim that the fate of the United States economy and stock market in 2024 -and, maybe, even the November elections will be determined by the forces arrayed at two consequential meetings held over 4,800km apart.

One was a sales conference on artificial intelligence (AI) that filled a hockey arena in San Jose, California, to the brim, the other a conclave on interest rates, inflation and unemployment at the Federal Reserve's white marble neoclassical headquarters in Washington.

The moods conveyed by the recent events couldn't have been more different: rampant optimism in Silicon Valley versus measured restraint at the central bank, which held short-term interest rates high to avoid setting off another wave of fierce inflation.

On Wall Street, which is closely monitoring both the tech economy and the Fed, excitement over the possibilities of AI riches outweighs concerns about interest rates and inflation. The stock market has already soared since the autumn of 2022 and shows every sign of powering higher.

But whether the current bull market has any chance of being sustained will depend in large part on the Fed's ability to dampen inflation without harming the core of the economy. And excessive exuberance in financial markets could further delay Fed rate cuts, which were expected to begin by now, but are now deemed unlikely to start until at least June. The Fed doesn't explicitly target asset prices, but it could be forced to hold rates high if it appears that a dangerous bubble is forming.