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How many people have a good discussion? The closer we get to the expected timing of the first US interest rate cut, the hotter the topic becomes – and the more individuals become involved in setting the interest rate. Ten of the Fed's 12 electors were able to schedule at least 20 public appearances between them in 2018. The last two weeks.
This has given market watchers a greater amount of feedback to analyze, even if the market's direction indicates more uncertainty about the Fed's policy path than it did before the volume of chatter started to rise. If anything, there is greater sensitivity. On Thursday, the S&P 500 reversed its enhanced morning gain of 0.8 percent to close down 1.2 percent — its worst day in eight weeks. This decline was not only caused by tensions over interest rates, but it did not help that oil prices reached their highest level in five months, exceeding the $90 level, at around the same time that Minneapolis Federal Reserve Bank President Neel Kashkari said… He will question the need for any interest rate cuts. Not at all if inflation does not decline further.
Kashkari isn't even a voting member of the Fed's rate-setting committee this year — regional Fed chairs rotate in those positions — but his comments were close to those of some of his colleagues who have more say in the deliberations.
All the talk and uncertainty doesn't make life in the markets easy. Back in December, investors could happily look forward to a series of cuts starting in the (then) distant summer. At that point, the amount of monetary easing – whether the six quarter-point cuts that investors had priced in, or the three cuts the Fed expected then and now – mattered less because the momentum depended on public relief that interest rates had risen. He reached his peak. Now the precise timing and scale of any relief is even more important.
From Fed spokesmen, the range of comments in the past two weeks or so has been reserved on the hawkish side by Atlanta Fed President Raphael Bostic and Fed Governor Christopher Waller, and on the more moderate side by Cleveland Fed President Loretta Mester. , which has a good reputation. As a hawk, he did not rule out an interest rate cut in June this week.
Bostic, who is typically considered more pessimistic, told CNBC he believes it is appropriate to consider cutting rates near the end of the year, while Waller, one of the most influential rate setters, said last week that the Fed should not be in a rush. To ease the policy. . Sitting in the middle, along with many unlucky investors, is Federal Reserve Chairman Jay Powell, who said this week that the Fed's inflation battle is “far from over” and that the central bank has time to wait for new economic data.
He's right, but that doesn't make investors' decisions any easier. Fed funds futures point to a quarter-percentage point cut by the end of the year, with a fair chance of a third rate cut. But it is better to view this as a proxy for a much broader range of market thinking.
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For example, economists at Citigroup were anticipating cuts of five percentage points, while Vanguard experts believed the Fed could see 2024 without any change. “Our base case scenario for this year includes a very high unemployment rate and two quarters of negative growth — i.e. a recession,” said Andrew Hollinghurst, an economist at Citi. “We believe weaker activity will prompt the Fed to cut interest rates by a quarter of a percentage point at each meeting beginning in June.”
From Vanguard's Qian Wang: “We look at the economy and see a potential scenario where inflation remains very flat and above target — and you also have growth above target. In that case, we don't think the Fed can claim mission accomplished.”
Investors should also take into account the US presidential elections scheduled for November. Ask Fed officials, and they'll say politics plays no role. But look at its actions over the past 30 years, and election years are actually different.
On average, US rate setters have held their interest rate steady at 71 percent of their election-year meetings, versus 67 percent in other years, according to a tally by Bespoke Investment Group. Narrow it down to the most politically charged period between May and November, which rises to 81 percent versus 65 percent. In presidential election years, the Fed cuts interest rates only 3 percent of its meetings during those months, compared to 14 percent in other years. “As we turn the pages of the calendar, it raises the question: Will the interest rate cuts being pushed further into the horizon?” asked the group's strategists.
Friday's bumper jobs numbers, combined with an unemployment rate of 3.8 percent, increased the risk that those expecting quick and deep action from the Fed would be disappointed.
Powell put markets on this uncertain path last August when he described the Fed as “navigating the stars under an overcast sky.” Investors have shown a great deal of confidence so far in his ability to chart the best course. But, if we mix travel metaphors, the rubber comes close to hitting the road. If the Fed doesn't become clearer soon about its direction — and the data may not allow for it — this year's stock market rally could soon start to run out of steam.
Jennifer. hughes@ft.com
