Could rate cut mania pushback be Fed chair Powell’s latest tactic to dampen the exuberant young bull market from a disorderly meltup?
The Everything rally based on the anticipated Fed pivot in the final quarter of 2023 was spectacular. The NASDAQ, technology stocks, and growth stocks sensitive to interest rates inverted by nearly 30%. Bonds had their best rally during the same period.
The recovery in asset prices across the asset spectrum into late 2023, and early 2024 has been spurred on by investors anticipating the end of the Fed’s tightening cycle.
Here are a few snippets from Fed Chair Powell’s speeches;
“We’ve jacked up our policy rates by 525 basis points over the past two years and moved it well into restrictive territory, and we’ve done nearly $1.3 trillion in QT, we’ve significantly tightened monetary policy, and we have been seeing the effects on inflation,” said Fed chair Powell.
Policy rates peak and rate cut mania pushback
“Inflation has eased over the past six months, and that’s very good, so I’d say our policy rate is likely at its peak for this tightening cycle, but we will need to see continuing evidence to build confidence that inflation is moving down sustainably toward our goal before we cut rates,” he added.
A potential head fake is the crux of the Fed’s rate cut mania pushback
The economy is good, it expanded faster in 2023 than we expected despite the tightened policy. And the labour market is rebalancing well, it’s still tight, and the pay increases are still strong, but it’s not out of whack like it was.
We’re not trying to slow the economy, but we need to make sure that inflation stays on track to 2% core PCE, and we need to make sure that we don’t fall for a head fake. We want to take advantage of this situation and finish the job on inflation while keeping the labour market strong.
So you ask, a rate cut in March? It’s premature to think rate cuts are right around the corner, we haven’t decided anything yet, it’s meeting by meeting,” said Powell.
Dampening March rate cut mania pushback.
“We will be data-dependent as we approach that question of when to begin to dial back restrictions. We will be looking at this meeting by meeting. But based on the meeting today, I would tell you that I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting to identify March as the time to cut rates,” said Powell.
So, unless the SHTF from now until March, interest rates will remain in restrictive territory, according to the Fed’s Chair’s latest rate cut mania pushback.
But do investors buy it?