The Cuts Go Marching One by One
This meeting was not expected to produce any changes in policy rates, and that was indeed the case. Perhaps this meeting can be described as the opposite of the popular saying: words speak louder than actions.
We did get confirmation that most FOMC members do expect to cut rates this year (no surprise here), but we did not get a reaffirmation of a pivot that would bring the first cut in March (surprise!). In fact, Chairman Jerome Powell said explicitly: “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting, to identify that March is the time to do that” when referring to the timing of the first rate cut.
The cuts go marching away as Powell pushes back on the idea that they’ll begin dropping rates at the next meeting. Fed fund futures bounced around a lot throughout the last two days as data rolled in, news broke about a new regional bank in possible trouble, and Powell wielded his word power. By the end of the trading day, a rate cut in March was mostly priced out.
Bottom line here is that markets were priced for cuts to start sooner, and they didn’t take kindly to pushing them out. The market reaction on the day of Fed statements tends to be erratic, so this big of a move doesn’t mean a new trend has formed, though it did take the cherry off the top of the sundae.
Most investors would point to the December meeting as a turning point in Powell’s commentary, affectionately referred to as the pivot we’d been waiting for that indicated a rate hiking cycle would soon turn into a rate cutting cycle. Now we’re listening to a post-pivot Powell, or a Powell on pause, trying to be clear about what the FOMC needs to see in order to actually reduce rates.
A couple elements of his comments today that stood out to me were the words “sustainable path”, as well as the multiple mentions of a labor market that was getting back into balance.
The sustainable path narrative was referring to a path toward 2% inflation, which the Fed remains committed to achieving. I am reminded that the Fed’s own year-end inflation projection is still 2.4%, which suggests that there is no rush to start cutting in the first quarter.
The labor market element was promising in the sense that Powell mentioned it coming back into better balance on numerous occasions, and seemed happy with the progress. The balance I think he was referring to is the magenta line in the chart below showing the ratio of the number of job openings to unemployed workers. That level is inching toward pre-pandemic readings, while not resulting in any material uptick in the unemployment rate.
Looking at this data and coupling it with falling inflation numbers, one could easily suggest we have a best-case-scenario economy right now. That may be true, but the key words are right now. The Fed has to toe the line between cutting rates too soon and reigniting inflation, versus waiting too long and restricting growth unnecessarily — neither of which would produce a positive result.
Cuts Both Ways
I think today served as a little tough love — a reminder not to assume that the “perfect” environment for stocks is one where the Fed starts cutting. The ability and willingness to cut does not make markets nor the economy invincible, and even though the market decided it wanted a cut in March, Jerome Powell made it clear that the FOMC is the one who calls the shots.
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