The market is outpacing the Fed
A high school track coach once told me that the secret to winning a sprint is to find the fastest kid on the track and then pass him.
That seems to be the investor's strategy. The Federal Reserve: Leading the Way and Staying Leading.
The Federal Funds futures market Reductions at each of the remaining three meetings Some investors expect the Federal Open Market Committee (FOMC) to start the year with a 50 basis point cut in September, while others expect the Fed to make quarter-point cuts at the September and November meetings, followed by a 50 basis point cut in December. Either way, the market is on the fence. Pricing at 100 basis pointsA one percentage point cut will be made by the end of the year.
By the end of next year, the market expects the federal funds rate to fall to around 3%. 225 basis points lower than todayThat would mean the Fed would announce five more quarter-point rate cuts next year, more than once every two meetings.
Given that bond and stock markets have not priced in a severe recession, it is difficult to see why interest rates could be cut at this pace. The Dow Jones Industrial Average and the S&P 500 are at or near all-time highs.The spreads between safer and riskier bonds give no evidence that investors see defaults or corporate bankruptcies as a serious threat.
According to The Conference Board's analysis of consumer confidence: The chances of a recession are actually decliningAfter an upward revision to 81.1 in July, August marked the second consecutive month the index has remained above 80, the threshold that typically signals a looming recession in the future.
Chairman Powell says he doesn't expect a sharp economic downturn
Fed Chairman at Jackson Hole Jerome Powell He signaled he was ready to take initial action in September, but avoided suggesting a sharp downturn in the labor market, instead emphasizing that the Fed does not expect or welcome such an event. Further weakening of the labor market.
moreover, No one knows what the U.S. government's fiscal policy will be next year. And beyond that. The policy mix will undoubtedly affect the appropriateness of further rate cuts. And that mix will depend not only on who wins the White House, but also on whether the occupant of the Oval Office has cooperative majorities in the House and Senate. Even with a divided government, fiscal constraints may be less likely. Both parties decided to spend money to win voter support. towards the midterm elections.
But the market has some justification for deciding that it makes sense to get ahead of the Fed. Earlier this year, the Fed backed away from plans to cut rates several times in 2024, dropping the median Fed forecast to one cut this year. Now, there are almost certainly more cuts than that, and officials like Atlanta Fed President Raphael Bostic have acknowledged that they have changed their forecast from one to two cuts. If the Fed was underestimating the pace of cuts a few months ago, Who could blame the market for thinking it might still be doing that?
