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Fed widely expected to cut rates by 25 bps on Wednesday

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Some investors brace for "hawkish cut," with Fed

suggesting

pause in easing cycle

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S&P 500 up 27% in 2024, with Nasdaq breaching 20,000 as

latest

equities milestone

By Lewis Krauskopf

NEW YORK, Dec 13 (Reuters) - A banner year for U.S.

stocks gets one of its last big tests with the coming week's

Federal Reserve meeting, as investors await the central bank's

guidance on interest rate cuts.

The Nasdaq Composite index breached 20,000 for the

first time ever in the past week, another milestone for equities

in a year during which the tech-heavy index has gained 32% while

the S&P 500 has risen about 27%.

Expectations that the Fed will cut interest rates have

supported those gains. But while the central bank is expected to

lower borrowing costs by another 25 basis points next week,

investors have moderated their bets on how aggressively

policymakers will move next year due to robust economic growth

and sticky inflation.

Bond yields, which move inversely to Treasury prices, have

risen in recent sessions as a result, taking the benchmark U.S.

10-year yield to a three-week high of 4.38% on

Friday. While stocks have pushed higher despite the rise in

yields, the 10-year is approaching the 4.5% level some investors

have flagged as a potential trip-wire for broader market

turbulence.

"Anything that results in an expectation that maybe the Fed

moves even more slowly from here than investors were expecting

could create a little bit of downside for stocks," said Jim

Baird, chief investment officer with Plante Moran Financial

Advisors.

The trajectory of monetary policy is closely monitored by

investors, as the level of rates dictates borrowing costs and is

a key input in determining stock valuations. Interest rate

expectations also sway bond yields, which can dim the allure of

equities when they rise because Treasuries are backed by the

U.S. government and seen as virtually risk-free if held to term.

Fed fund futures indicated a 96% chance the Fed will cut by

25 basis points when it gives its policy decision on Wednesday,

according to CME FedWatch data as of Friday.

But the path for rates next year is less certain. Fed fund

futures are implying the rate will be at 3.8% by December of

next year, down from the current level of 4.5%-4.75%, according

to LSEG data. That is about 100 basis points higher than what

was priced in September.

The Fed's summary of economic projections released at the

meeting will provide one indication of where policymakers see

rates heading. Officials penciled in a median rate of 3.4% for

the end of next year when the summary was last released in

September.

One sign of potential support for a slower pace of cuts came

from Fed Chair Jerome Powell, who this month said the economy is

stronger now than the central bank had expected in September.

Another factor that could make Fed officials more cautious

about future cuts is the presidential election of Donald Trump,

whose pro-growth economic policies and favoring of tariffs are

causing concerns about stronger inflation next year.

Analysts at BNP Paribas said they expect a "hawkish cut,"

with the central bank likely to "open the door for a pause in

further cuts of undefined length."

Carol Schleif, chief market strategist at BMO Private

Wealth, said markets "will be trying to read into how worried is

the Fed about inflation."

November data released in the past week showed progress in

lowering inflation toward the U.S. central bank's 2% target has

virtually stalled.

Still, analysts say the market's momentum favors more gains

into year end, while sentiment among investors in surveys

remains bullish - though some market technicals suggest the

rally in stocks may have grown stretched.

The percentage of Nasdaq constituents hitting 52-week highs

has declined since the rally after the Nov 5 election, implying

fewer stocks are supporting the advance, Adam Turnquist, chief

technical strategist for LPL Financial, said in a note on

Thursday.

"History suggests the tech-heavy index could be due for a

breather before longer-term momentum resumes," Turnquist said.