Lovers, Dreamers, and Rate Cuts
Long before the green frog had any political meaning, America’s most famous frog asked: Why are there so many songs about rainbows?. Kermit’s research could be a useful starting point for considering rate cuts.
A rainbow paints promise in the sky in a gentle dance of light and mist. That promise, upon closer inspection, whispers something more elusive, more fantastical.as if The earth itself is reaching out to embrace this arc of color.Every time we take a step toward it, it only recedes into the arms of the horizon.
(License/Getty Images)
This phenomenon is a ballet of optics and aspiration. The beginning of a long-anticipated interest rate cutting cycle From the Federal Reserve System. The closer we get to the point where we hope to find its origin, the further away it appears.
Retreat of the pigeons
Wall Street began the year with expectations that the Fed would cut interest rates six times this year, lowering the benchmark federal funds rate to a range of 3.75% to 4.0% from its current range of 5.25% to 5.50%. The market has been more competitive than Fed officials expected, with the median estimate pointing to a rate cut of just three quarter points in December. Only one point in the dot plot had an interest rate as low as the market price would suggest.
To understand how offensive this view was, remember that: The Federal Open Market Committee only meets eight times a year.. As a result, markets expected the Fed not only to start cutting rates early this year, but to do so at nearly every meeting.
In the face of continued resistance from the Fed, the market has backed away from this view. At the Fed’s March meeting, The median view again predicted three rate cuts.–However, the dot plot shows that if one more Fed official had gone hawkish, the rate cuts would have been reduced to two.
The start date for the cuts has been steadily pushed back. The Fed succeeded in telling the market at its January meeting that it would not cut interest rates at its March meeting. At the general meeting in March, The message was more vague. As for when the first cuts will arrive. But the date has been pushed further down the calendar as economic indicators show that the economy continues to grow above trend.
The implied probability of a rate cut in May is less than 5%. What’s even more interesting is that the implied odds for a June rate cut are below 60%. Like the end of the rainbow, Interest rate cuts continue to recede over the horizon.
Powell’s asymmetrical patience
In a conversation with Kai Ryssdal last week, the Fed chairman said: Jerome Powell stuck to message that the Fed can afford to be patient Regarding interest rate cuts. The economy may not be growing at the breakneck pace seen in the second half of last year, but it is growing faster than analysts and the Fed expected. More importantly, it’s growing fast enough that there’s no need to rush to cut interest rates.
Perhaps the most important clarification from Mr. Powell’s remarks was that Mr. Powell said: Inflation data in January and February did not support rate cuts. That should have been obvious. The personal consumption expenditure price index increased at an annual rate of 4.2% in January and 4.1% in February. The 3-month average is higher than the 6-month average, indicating that the trend is going in the wrong direction. But Mr. Powell needed to say that because many Wall Street analysts were confident that inflation was still cool enough to warrant a rate cut.
Still, there was a dovish asymmetry in Powell’s remarks. Powell said further strength in the economy could delay the start of rate cuts, especially if inflation remains high. However, there was no talk about the possibility of rate hikes. It’s not the direction that matters, it’s the timing.
As a result, the Fed’s next action could be an uptrend rather than a downtrend. Probably the cheapest risk on the market. Futures prices and bond yields suggest there is no chance the Fed will raise rates this year or next.That seems to be the case, given how significantly economic growth has surprised upwards. confident without any basis.
When I finally found it rainbow connectionwe might be surprised what’s on the other side.
