Yesterday’s Fed Policy Meeting had a self-congratulatory feeling as Fed Chair Powell remarked, “The era of this frantic labor shortage is behind us. Overall, the development of the labor market has been very positive. It’s been a good time for workers to find jobs and get solid wage increases.” Powell has always stressed the Fed’s altruistic mandate, especially after the pain caused by the rate hikes. He cheered the long-sought “labor market balance” and cited increased labor-forced participation as extremely positive. “Recent indicators suggest that growth in economic activity has slowed substantially and that higher rates are slowing investment.” He noted that the Fed is now seeing progress on inflation across the three main core areas. Translation: we don’t have to raise rates further. The Fed’s new “dot plot” of interest rate predictions indicates they expect 3 rate cuts in 2024 (the last dot plot in September predicted 1 rate cut in 2024). The Federal Reserve is willing to cut rates even if the U.S. economy doesn’t dip into a recession in 2024, Powell said. “It could just be a sign that the economy is normalizing and doesn’t need the tight policy.” Powell feels the Fed will accomplish the rarely seen “soft landing.” Of course, he had to add the “disclaimer” to demonstrate his inner hawk. “We are prepared to tighten policy further if appropriate,” he said at the post-meeting press conference. That mandatory quote must be taped to his podium.
Did you ever wonder how to say, “Let’s Get This Party Started!” in Fed speak? Here you go. “The question of when it will become appropriate to begin dialing back the amount of policy restraint in place…and is clearly a discussion topic…out in the world and…for us at our meeting …I would say there’s a general expectation that this will be a topic for us looking ahead.” Bam! Equity and bond markets immediately went on an epic rally. Dow hit a new closing high (above 37,000) and the 10-year Treasury dropped to 3.91% (down from 4.30% on Monday). The 5-year went below 3.90%. The 3 rate cuts predicted in the dot plot are about half of what the market now expects. Fed Futures indicate the market expects 6 rate cuts in 2024. There are 8 Fed meetings next year. Assuming there is no rate cut at next month’s meeting, that’s about 25 bps per meeting. 2024 being an election year (have you heard?) may be pushing Powell to “telegraph” rate cuts in advance and possibly front-load them earlier in the year to avoid the appearance of political meddling. The dovish pivot is causing some to wonder. What does the Fed know? Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.
