In the Arthur Conan Doyle short story “Silver Blaze,” Sherlock Holmes solves the case of a stolen horse because a dog in the stable didn’t bark during the crime. He deduces that it was an inside job, performed by somebody the dog already knew.

Doing nothing is sometimes the most meaningful act of all. Today, the Federal Reserve was the dog that didn’t bark.

In a surprise to no one, the Fed’s policy-setting Federal Open Market Committee (FOMC) on Wednesday left the federal funds rate unchanged at a range of 5.25% to 5.50%. The decision was unanimous.

The Fed’s non-action on rates cheered investors and sent stocks sharply higher. In its official statement, the FOMC noted:

“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

In Fed-speak, the word “financial” seems to be a pointed reference to the economically deleterious effects of higher long-term bond yields, which in turn help obviate the need for policy rate hikes.

The Fed signaled that it’s leaving the door open to hike rates at its December meeting, but there are compelling reasons to believe that the central bank will start to cut interest rates by mid-2024.

While the U.S. enjoyed a robust recovery from the pandemic-induced recession, there are signs that the pace of growth is slowing.

The Conference Board reported on Tuesday that its Consumer Confidence Index fell for the third consecutive month. The index declined from 104.3 in September to 102.6 in October. That’s the second-lowest level we’ve witnessed in 2023, slightly above May’s anemic 102.5 reading.

On Wednesday, the ISM Manufacturing Index came in at 46.7 versus 49.2 estimated. A reading above 50 is indicative of expansion, while a reading below 50 denotes contraction.

The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) indicated that job openings in September changed little at 9.6 million openings (versus 9.3 million estimated), slightly up from August’s revised total of 9.5 million. The rate of workers quitting their jobs was flat, at 2.3%, for the third consecutive month. Wage gains slowed.

The recent batch of economic data shows that the Fed’s tightening campaign is working. The Fed announced a “pause” at its September meeting as well. The last time the Fed raised rates was at its July meeting.

Powell: The Fed is “proceeding carefully”…

After the FOMC’s announcement, Fed Chair Jerome Powell held his customary post-meeting press conference. Given his tendency to talk down the markets, I’d prefer that Powell just told a few jokes and performed card tricks. But admittedly, this time around his remarks were relatively benign.

Powell noted that financial conditions have clearly tightened, adding: “The full effects of our tightening have yet to be felt. Given how far we have come, along with the uncertainties and risks that we face, the committee is proceeding carefully.”

Powell cautioned that “three months of good [inflation] data are only the beginning” of the kind of sustainable declines in prices that the Fed wants to see before easing up rates. He struck a stance of patience: “We’re going meeting by meeting.”

The Fed has raised its benchmark rate 11 times so far in its campaign to curb inflation. The following chart shows the steep rise in the fed funds effective rate, which currently hovers at a 22-year high:

A recession, or even just a slowdown in economic activity, would prompt the Fed to lower interest rates next year. What’s more, the further decline of inflation that’s expected in 2024 would provide the Fed with the room it needs to cut rates.

WATCH THIS VIDEO: Stock Market Outlook 2024: The Perils and Profits Ahead

The global economic environment also plays a significant role in shaping the Fed’s monetary policy decisions. In an increasingly interconnected world, the central bank considers how global factors can affect the U.S. economy.

Looming large on the international stage are the horrific wars in the Middle East and Eastern Europe. In October, five central banks held rates steady.

If global economic conditions deteriorate in 2024, it could put pressure on the Fed to adopt a more accommodative stance. Historically, rate cuts have boosted the stock market as well as corporate earnings.

Lower interest rates can make fixed-income investments, such as bonds, less attractive. When bond yields are low, investors turn to the stock market in search of higher returns.

The end of the Fed’s rate tightening cycle hasn’t occurred yet, but it’s getting closer and the central bank’s hawkishness is waning. That sets up the stock market for solid gains in 2024.

Investors applauded the Fed’s decision to stand pat. The main U.S. stock market indices on Wednesday closed sharply higher, as follows:

• DJIA: +0.67%
• S&P 500: +1.05%
• NASDAQ: +1.64%
• Russell 2000: +0.45%

The benchmark 10-year U.S. Treasury yield slipped 1.76% to settle at 4.78% and the CBOE Volatility Index (VIX) plunged nearly 8% to land at about 16.80. We may have witnessed the bottom of the autumnal slump.

High-yield hunting…

When the Fed pivots next year as expected, the rate-sensitive utility sector is likely to soar. Utility companies typically offer relatively high dividend yields, and they are known for providing steady and predictable cash flows.

When interest rates are cut, fixed-income investments like bonds and savings accounts become less attractive due to their lower yields. Investors seek higher-yielding alternatives, such as utility stocks, to generate income, driving up demand for these equities and pushing their prices higher.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

Do you seek peace of mind in today’s uncertain investment climate? As you position your portfolio for next year, turn to utilities stocks. These stable, high-dividend stalwarts provide shelter from the storm.

Utilities have taken a beating lately due to higher rates, but we’re poised to see sector rotation in 2024, whereby the laggards become leaders.

Utilities stocks offer growth, income and asset protection. That’s an unbeatable combination. But you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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