QT taper - >>> The Fed announced a big change today. And no, we’re not talking about interest rates


CNN

by Nicole Goodkind

May 1, 2024


https://finance.yahoo.com/news/fed-could-big-change-today-113528226.html


Wednesday’s Federal Reserve policy decision was fairly boring for investors — officials kept interest rates the same, just as they have since July 2023.

But some savvy traders are excited about another key decision. The Fed announced that it will significantly curtail its quantitative tightening (QT) program — that’s the selling off of its assets to decrease money supply and increase interest rates — beginning in June.

US Treasury yields fell on the news. Yields on the 10-year and 2-year both dropped by .05 percentage points.

What’s happening: The Fed bought a ton of government-backed bonds between 2020 and 2022 to help support economic recovery after the pandemic-induced recession. Those purchases ended up pushing down interest rates in certain parts of the economy, like housing and auto sales.

In mid-2022, as inflation soared higher, the Fed reversed that and began unloading those bonds.

The Fed currently lets up to $60 billion in Treasuries mature each month without replacing them, reducing the amount of money circulating in the economy. The idea is that QT can help exert some downward pressure on prices.

But there’s also some downside to the practice — changing the amount of liquidity in the economy and redirecting that money could have some major consequences.

As JPMorgan Chase CEO Jamie Dimon pointed out in his annual letter to shareholders last month, “we have never truly experienced the full effect of quantitative tightening on this scale.” The current pace of QT is draining more than $900 billion in liquidity from the system annually, he said, adding, “I am more worried [about it] than most.”

QT reduces the amount of money in the banking system, leading to higher interest rates and tighter monetary conditions, but last time the Fed implemented such a program in 2019, some banks fell very short of reserves.

That led to a “repo crisis”, where the interest rates for overnight loans between banks spiked unusually high. The Fed had to intervene and provide liquidity to bring down those repo rates.

Fed Chair Jerome Powell doesn’t want a repeat of 2019 and said at his last press conference that QT would be scaled back soon.

On Wednesday, officials announced that they will lower the rate of QT to $25 billion, more than half of where it currently sits.

What it means: “May 1 is set to be a big day in the bond market,” Evercore ISI’s Krishna Guha and Marco Casiraghi wrote in a recent note.

If the Fed does ease up its tightening policy, “financial markets will likely see the taper of the QT program as bullish for riskier investments like stocks and bonds at the margin,” wrote Bill Adams, chief economist for Comerica Bank, in a note on Tuesday.

That’s because a taper should send bond prices higher, and interest rates lower.

The risk, wrote Bank of America analysts on Tuesday, “is skewed to the upside for stocks, in our view, especially given a potential QT taper announcement".

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WSJ - Timiraos - >>> Fed to Signal It Has Stomach to Keep Rates High for Longer


The Wall Street Journal

by Nick Timiraos

4-30-24


https://www.msn.com/en-us/money/markets/fed-to-signal-it-has-stomach-to-keep-rates-high-for-longer/ar-AA1nUQof?cvid=482d5eba932247e68c1fe028770906b5&ei=51


An ancient Chinese proverb that counsels “do nothing, and everything will be done” could sum up the Federal Reserve’s latest approach to interest-rate policy.

Fed officials will hold their benchmark federal-funds rate steady at its highest level in more than two decades, around 5.3%, at their two-day policy meeting that begins Tuesday.

Firmer-than-anticipated inflation in the first three months of the year has likely postponed rate cuts for the foreseeable future. As a result, officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.

With no new economic projections at this meeting and minimal changes expected to the Fed’s policy statement, Fed Chair Jerome Powell’s press conference will be the main event on Wednesday. Here’s what to watch:

The inflation setback

Since officials’ meeting in March, the economy has continued to demonstrate strong momentum. But inflation has disappointed after a string of cool readings in the second half of 2023 stirred optimism the central bank might be able to lower rates.

In March, Powell held out the prospect that strong price pressures in January had been a bump on the road to lower inflation. Firm readings for February and March (even if not quite as hot as January) punctured that optimism. They raise the prospect that inflation might settle out closer to 3%. The Fed targets 2% inflation over time.

Powell is likely to repeat a message he delivered two weeks ago, when he said recent data had “clearly not given us greater confidence” that inflation would continue declining to 2% “and instead indicate that it’s likely to take longer than expected to achieve that.”

The focus at this meeting will be how Powell characterizes the interest-rate outlook. While most Wall Street strategists think one or two rate cuts are still possible later this year, the prospect of such a recalibration without clear evidence of economic weakness remains a bigger wild card than it did just a few weeks ago. Some think the Fed might not cut at all.

The Fed’s rate outlook hinges on its inflation forecast, and the most recent data raises two possibilities. One is that the Fed’s expectation that inflation continues to move lower but in an uneven and “bumpy” fashion is still intact—but with bigger bumps. In such a scenario, a delayed and slower pace of rate cuts is still possible this year.

A second possibility is that inflation, rather than on a “bumpy” path to 2%, is getting stuck at a level closer to 3%. Without evidence that the economy is slowing more notably, that could scrap the case for cuts altogether.

Rate policy remains “well-positioned”

Powell is likely to acknowledge that officials have less conviction about when and how much to reduce interest rates. In March, most officials projected two or more rate cuts would be appropriate this year, and a narrow majority penciled in at least three cuts.

Even though officials won’t submit new projections this week, at other meetings without them, Powell has taken the opportunity to reaffirm those one-meeting-old projections or, alternatively, declare them out of date. Wednesday’s meeting is more likely to yield the latter outcome.

At the same time, Fed officials have indicated that they are broadly comfortable with their current stance. This makes a hawkish pivot toward entertaining rate increases unlikely.

“Policy is well-positioned to handle the risks that we face,” Powell said on April 16. If inflation continues to run somewhat stronger, the Fed will simply keep rates at their current level for longer, he said.

As financial-market participants anticipate fewer cuts, longer-dated bond yields will rise. In effect, this achieves the same kind of tightening in financial conditions that Fed officials sought when they raised interest rates last year. Higher yields across the Treasury yield curve should ultimately hit asset values, including stocks, and slow the economy’s momentum.

If inflation stays firm “that is what they will want to see, ultimately,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale.

Low risks of a hawkish pivot

The difficulty for Fed officials in communicating their outlook right now boils down to the conditional nature of the “if/then” statements volunteered by Fed officials, which are premised on one set of outcomes. When the economy performs in ways that officials don’t anticipate, their past statements may no longer be valid.

To that end, Powell might be hard-pressed to rule out any additional increases, even though it is likely premature for officials to meaningfully move in that direction.

But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.

A key measure of wage growth released Tuesday showed that a sustained cooling in wage growth last year may have stalled in the first quarter. Compensation for private-sector workers rose 4.1% in the first quarter from a year earlier, essentially unchanged from the fourth quarter, the Labor Department said.

Signs that wage pressures had been easing were an important factor allaying some Fed officials’ concerns about stickier service-sector inflation. Additional evidence in the coming months that wage growth is accelerating could trouble officials.

The balance sheet

Fed officials have said they could announce “fairly soon” their plan to slow the runoff of their $4.5 trillion in holdings of Treasury securities, which are part of their $7.4 trillion asset portfolio. That has led analysts to expect a formal plan announcing the slowdown at their meeting this week, though some see a chance this happens at their subsequent meeting in June.

At issue is a program the central bank initiated two years ago to passively reduce those holdings by allowing bonds to “run off” its balance sheet without buying new ones. It acquired trillions in Treasurys and mortgage bonds to stabilize financial markets in 2020 and to provide additional stimulus in 2021.

Every month, officials have allowed as much as $60 billion in Treasury securities and as much as $35 billion in mortgage-backed securities to mature without being replaced. The process is designed to shrink the Fed’s balance sheet, which topped out at nearly $9 trillion two years ago.

At the March meeting, officials appeared to coalesce around a plan to reduce the pace of runoff “by roughly half.” Because high interest rates have kept mortgage-bond runoff at a subdued level, officials wouldn’t change that part of their program and instead lower the cap on monthly Treasury redemptions.

The latest changes aren’t related to the setting of interest rates and are instead designed to avoid a messy upheaval in overnight lending markets that occurred five years ago.

The reduction in assets is also draining the financial system of bank deposits held at the Fed, which are called reserves. Officials don’t know at what point reserves will grow scarce enough to push up yields in interbank lending markets. Slowing the process now is seen as preferable by many officials because it could allow the portfolio runoff to continue for somewhat longer without risking the same kind of market ruckus that occurred in 2019.

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>>> Imports hold back US economy in first quarter, inflation flares up


Reuters

by Lucia Mutikani

Apr 25, 2024


WASHINGTON (Reuters) - The U.S. economy grew at its slowest pace in nearly two years in the first quarter amid a surge in imports and small build-up of unsold goods at businesses, signs of solid demand that together with an acceleration in inflation reinforced expectations the Federal Reserve would not cut interest rates before September.

The cooler-than-expected growth reported by the Commerce Department in its snapshot of first-quarter gross domestic product on Thursday, which also reflected a downshift in government spending, exaggerated the moderation in economic activity. Domestic demand, a better growth measure, was strong as consumer spending moderated slightly while business investment picked up and the housing recovery gained steam.

Trade and inventories are the most volatile GDP components, and are often subject to revision when the government updates its growth estimates. Fed officials are expected to leave rates unchanged at the U.S. central bank's policy meeting next week.

"The Fed will likely see the GDP report as solid, while the upward surprise to inflation will support the central bank's case for waiting longer before cutting rates," said Daniel Vernazza, chief international economist at UniCredit.

GDP increased at a 1.6% annualized rate last quarter, the slowest pace since the second quarter of 2022, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast GDP would rise at a 2.4% rate, with estimates ranging from a 1.0% pace to a 3.1% rate.

The economy grew at a 3.4% rate in the fourth quarter. The first-quarter growth pace was below what U.S. central bank officials regard as the non-inflationary growth rate of 1.8%.

Excluding inventories, government spending and trade, the economy grew at a 3.1% rate after expanding at a 3.3% rate in the fourth quarter. That also dispels the notion that government spending was fueling the economy.

The U.S. economy, which has outperformed the economies of other advanced nations, is being supported by a resilient labor market.

U.S. Treasury Secretary Janet Yellen told Reuters in an interview that she was focused on consumer and business spending.

"Those two elements of final demand came in line with last year's growth rate ... so this is the underlying strength of the U.S. economy that showed continuing robust strength and an economy firing on all cylinders."

Price pressures heated up by the most in a year, with a measure of inflation in the economy increasing at a 3.1% rate after rising at a 1.9% pace in the October-December quarter.

The personal consumption expenditures (PCE) price index excluding food and energy surged at a 3.7% rate after increasing at a 2.0% pace in the fourth quarter.

The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. Inflation was boosted by increases in the costs of services like, transportation, insurance and housing, which offset a decline in goods prices such as motor vehicles and parts.

The strong readings pose an upside risk to March PCE inflation data due to be released on Friday, though much would depend on revisions to the January and February data.

The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range since July. It has raised the policy rate by 525 basis points since March of 2022.

Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.

TIGHT LABOR MARKET

A significant slowdown in the labor market is not yet evident. The Labor Department's weekly jobless claims report showed initial claims for unemployment benefits fell 5,000 to a seasonally adjusted 207,000 in the week ending April 20.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, declined 15,000 to 1.781 million during the week ending April 13. The so-called continuing claims data covered the period during which the government surveyed households for April's unemployment rate.

Continuing claims fell between the March and April survey periods, implying the unemployment rate was likely unchanged after dipping to 3.8% last month from 3.9% in February.

Low layoffs are keeping wages high, sustaining consumer spending, which accounts for more than two-thirds of economic activity. Consumer spending grew at a still-solid 2.5% rate, slowing from the 3.3% growth pace rate notched in the October-December quarter. Spending was driven by healthcare, financial services and insurance, which more than offset a decline in goods, including motor vehicles and gasoline.

Spending is likely to gradually cool this year. Lower-income households have depleted their COVID-19 pandemic savings and are largely relying on debt to fund purchases. Recent data and comments from bank executives indicated that lower-income borrowers were increasingly struggling to keep up with their loan payments.

Though income increased at a $407.1 billion rate compared with the fourth quarter's $230.2 billion pace, the gains were eroded by inflation and higher taxes. Income at the disposal of households after accounting for inflation and taxes rose at a 1.1% rate versus a 2.0% pace in the October-December quarter.

The saving rate decreased to 3.6% from 4.0% in the prior quarter.

"The recent stickiness in inflation lends downside risk to the near-term forecast for consumption as it could weigh on real disposable income," said Ryan Sweet, chief economist at Oxford Economics.

Inventories were whittled down, rising at a $35.4 billion rate after increasing at a $54.9 billion pace in the fourth quarter. Inventories subtracted 0.35 percentage point from GDP growth. Part of the spending was satiated with imports, which resulted in the trade deficit widening to $973.2 billion from $918.5 billion in the October-December quarter. Trade chopped off 0.86 percentage point from GDP growth.

Government spending decelerated to a 1.2% rate from the 4.6% pace notched in the October-December quarter amid a decline in federal government outlays, mostly defense. Business spending picked up as companies invested in artificial intelligence.

Investment in nonresidential structures like factories contracted for the first time in more than year as the boost from policies by the Biden administration to bring the production of semiconductor manufacturing back to the U.S. faded.

Residential investment recorded its fastest pace of growth since the fourth quarter of 2020, thanks to rising home sales and housing construction, despite higher mortgage rates.

"Don't underestimate this economy," said Shannon Grein, an economist at Well Fargo.

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>>> January economic data challenges soft landing narrative


Yahoo Finance

by Josh Schafer

February 19, 2024


The growing economic consensus has hit a bump in the road.

Over the past several months a string of stronger-than-expected data had many investors embracing a possible soft landing, in which inflation would fall to the Federal Reserve's 2% goal without a severe economic downturn.

Recent data over the past week has challenged that narrative. January inflation reports from the Consumer Price Index (CPI) and Producer Price Index (PPI) showed prices increased more than economists projected in the last month. And the January retail sales report showed sales dropped by more than economists had expected. In other words, neither inflation nor consumer strength improved.

To some, one month's prints could be points of concern, but not necessarily game changers.

"Let's not get amped up when you get one month of CPI that was higher than what you expected," Chicago Fed President Austan Goolsbee said during a question-and-answer session hosted by the Council on Foreign Relations in New York on Wednesday. "It is totally clear that inflation is coming down."

While Goolsbee may have a point that one print might not change a trend, the recent string of January data is notable because it's largely the first chunk of data to challenge the soft landing narrative since Federal Reserve Chair Jerome Powell hinted the US economy may be headed to the ideal outcome during the December Fed meeting.

"The data is stacking up against investors in a way that's making people more nervous," SoFi head of investment strategy Liz Young told Yahoo Finance Live.

Prior to the readings in the past week, the data hadn't worked against investors. Fourth quarter economic growth had come in higher than expected. The January jobs report shocked economists. And the December retail sales print came in better than anticipated, all while wage increases continued to provide a positive outlook for consumer spending and inflation continued to moderate.

After this week though, economists are cutting their projections for first quarter gross domestic product (GDP), a popular economic growth measure. Goldman Sachs has shifted its forecast from 2.9% annualized growth in the first quarter entering the week down to 2.3%. The Atlanta Fed's GDP tracker moved down to 2.9% from a 3.4% projection on Feb. 8. Not auspicious for the economic growth component of a soft landing.

The data is also moving projections for Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, ahead of its release later this month. Goldman now projects core PCE, which excludes the volatile food and energy categories, increased 0.43% in January, an increase from its prior forecast of 0.35%. Bank of America's economics team also sees a reading near 0.4%.

Notably, this would bring the six- and three-month annualized rates, which had been celebrated recently as tracking below the Fed's 2% target, back above the 2% level. Not auspicious for the second component of a soft landing.

"While January data are often noisy, the inflation data do suggest that disinflation took two steps back in January," Bank of America US economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.

Juneau and Gapen wrote that the January inflation data vindicates the Fed's "wait-and-see approach" to cutting interest rates, and that they agree with the new market consensus that the first interest rate cut will come in June rather than March or May.

This marks a stark shift in investor sentiment on Fed cuts. Investors are now pricing in a roughly 35% chance the first cut comes in May, per the CME FedWatch Tool. A month ago, investors had placed a 97% chance that the first cut would come by the end of the May meeting.

With the Fed rate cut question mostly answered for now, the looming question remains whether the twin inauspicious data points of inflation and consumer strength have upended hopes for a soft landing.

Gapen noted in a weekly economic roundup that it's still too early to tell.

"Our (perhaps unsatisfying) take is that investors should remain in wait-and-see mode," he wrote.

"The surprises in jobs, inflation, retail sales, and [industrial production] were all probably a combination of signal and noise. ... we need to see a few more weeks' worth of data before drawing strong conclusions on the trajectory of the economy."

Consumers, for their part, are still saying they're doing great.

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>>> The Federal Reserve Broke The Budget. Buckle Up For What Comes Next.


Investor's Business Daily

by JED GRAHAM

11/24/2023


https://www.investors.com/news/economy/federal-reserve-broke-the-budget-what-budget-deficits-mean-for-the-economy-and-sp-500/?src=A00220

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Full article - https://investorshub.advfn.com/boards/read_msg.aspx?message_id=173293135



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>>> De-Dollarization Is Happening at a ‘Stunning’ Pace, Jen Says


Bloomberg

by Matthew Burgess

April 18, 2023


https://finance.yahoo.com/news/dollarization-happening-stunning-pace-jen-082144378.html


(Bloomberg) -- The dollar is losing its reserve status at a faster pace than generally accepted as many analysts have failed to account for last year’s wild exchange rate moves, according to Stephen Jen.

The greenback’s share in global reserves slid last year at 10 times the average speed of the past two decades as a number of countries looked for alternatives after Russia’s invasion of Ukraine triggered sanctions, Jen and his Eurizon SLJ Capital Ltd. colleague Joana Freire wrote in a note. Adjusting for exchange rate movements, the dollar has lost about 11% of its market share since 2016 and double that amount since 2008, they said.

“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen and Freire wrote. “Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries,” most of which are emerging economies from the so-called Global South, they said.

Jen is the former Morgan Stanley currency guru who coined the dollar smile theory.

Last year, Bloomberg’s gauge of the greenback surged as much as 16% as the conflict helped fuel a rise in global inflation that triggered widespread interest rate hikes which sank bond and currency markets alike. It finished the year up 6%.

Biden’s Dollar Weaponization Supercharges Hunt for Alternatives

Smaller nations are experimenting with de-dollarization while China and India are pushing to internationalize their currencies for trade settlement after the US and Europe cut Russian banks from the global financial messaging system known as SWIFT. There’s also concern the dollar may become a permanent political tool, or be used as a form of economic statecraft to put extra pressure on countries to enforce sanctions that they may disagree with.

The US currency now represents about 58% of total global official reserves, down from 73% in 2001 when it was the “indisputable hegemonic reserve,” the Eurizon pair said.

That said, the dollar’s role as an international currency won’t be challenged anytime soon as developing countries don’t yet have the ability to divest from the greenback for transactions due to its large, liquid and well-functioning financial markets, Jen and Freire wrote.

Still, the persistence of those conditions “is not preordained” and there may come a time when the rest of the world actively avoids using the dollar, they wrote.

“The prevailing view of ‘nothing-to-see-here’ on the US dollar as a reserve currency seems too innocuous and complacent,” the two wrote. “What needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”

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>>> The great central bank policy reversal kicks off


Reuters

by Balazs Koranyi and Howard Schneider

March 22, 2024


https://finance.yahoo.com/news/analysis-great-central-bank-policy-061353930.html


FRANKFURT/WASHINGTON (Reuters) -The world's biggest central banks are on the starting line of reversing a record string of interest rate hikes but the way down for borrowing costs will look very different from the way up.

There will be no floodgates or fireworks. Instead, banks on opposite sides of the Atlantic are likely to move in the smallest increments with periodic pauses, fearing that ultra-low unemployment could rekindle inflation rates still above their targets.

The eventual bottom for interest rates is also set to be far higher than the historic lows of the last decade and mega-shifts in the structure of the global economy could put borrowing costs on a higher path for years to come.

Central banks started to jack up rates from late 2021 as post-pandemic supply constraints and surging energy prices on Russia's war in Ukraine sent inflation into double-digit territory across much of the world.

This seemingly synchronized response tamed prices and inflation will be just above or already at target - 2% for most big economies - this year.

"The bottom line is that across the OECD, central banks... are softening up again, or are about to do so," investment bank Macquarie said in a note to clients.

Indeed, the Swiss National Bank became the first major central bank (to) ease policy on Thursday with a surprise 25 basis point cut to its key rate as inflation is already in the 0% to 2% target range.

The move also ends rampant investor speculation that policymakers will be hesitant to move before the U.S. Federal Reserve since any rate cut is certain to weaken a currency and push up imported inflation.

The European Central Bank is bound to be next in June after incessantly repeated references to that meeting painted the bank into a corner.

The Fed and the Bank of England both hinted they could be next but have kept their language sufficiently vague to make moves in either June or July possible, provided data do not upset plans.

Still, investors expect the Fed, the ECB and the BoE to each deliver only 75 basis points of cuts by the end of this year, in three 25 basis point moves, tiny changes compared to rate hikes in 2022 when they sometimes increased rates by that much in a single day.

The pricing also suggests cuts at just three out of the five meetings each will hold between June and the end of the year, so pauses are also on the cards.

To be sure, these banks are not the first to cut rates. Some emerging market economies, like Brazil, Mexico, Hungary and the Czech Republic have all cut rates already, but financial markets take their cue from the major central banks, so their influence on financial instruments is oversized.

OUTLIER

The Federal Reserve could in fact end up being the outlier this time.

The U.S. economy is chugging along and the Fed even upgraded its growth projections this week, meaning it may end up cutting rates when growth remains strong, or delaying cuts if inflation proves stubborn. In Europe, data continues to paint a bleak picture, with activity stabilizing at a low level.

The U.S. election in November adds to the Fed's dilemma.

Policymakers do not want to be seen interfering with the vote, so if they cut, they need to do it well clear of November.

"Traditionally, the Fed would not pivot rates policy to cushion inequality," Societe Generale strategist Albert Edwards said. "But growing inequality has been a key issue ever since the 2008 Global Financial Crisis triggered a backlash against ‘The Establishment’ - most evident in the rise in popularism."

"Might the unfolding inequality crisis force the Fed to bow to intense political pressure to cut rates faster and deeper? I think that is entirely plausible," Edwards said.

Fed Chair Jerome Powell in congressional testimony earlier this month said policymakers would "keep our heads down and do our jobs" ahead of the elections.

All the while Europe continues to struggle. Germany is in recession, Britain is barely growing after a recession, and the rest of the continent is staying in positive territory mostly from unexpectedly strong data out of Southern Europe, traditionally the euro zone's weak spot.

Where rate cuts could end in either 2024 or 2025 remains far too uncertain but policymakers appear confident that the ultra low rates - negative in some cases - will not be revisited.

In fact, some argue that the world is undergoing such profound changes that the historic downtrend in the so-called neutral rate, which neither stimulates nor slows growth, could reverse.

"We may now be facing such a turning point," ECB Executive Board member Isabel Schnabel said this week.

"The exceptional investment needs arising from structural challenges related to the climate transition, the digital transformation and geopolitical shifts may have a persistent positive impact on the natural rate of interest."

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>>> The Fed’s massive economic upgrade: Chart of the Week


Yahoo Finance

by Ethan Wolff-Mann

Mar 23, 2024


https://finance.yahoo.com/news/the-feds-massive-economic-upgrade-chart-of-the-week-123035274.html


Ahead of the Fed’s meeting this week, everyone was focused on dots.

But the most important number offered by Fed officials was the FOMC’s surprisingly bullish expectations for economic growth, revised upward, as our Chart of the Week shows.

In December, the market cheered after hopes for rate cuts were restored following pleasing inflation numbers. But economic growth projections for 2024 had fallen to 1.4% from September’s 1.5% projection for 2024 GDP growth.

Now, though disinflation may have stalled in comparison to December, the FOMC projects 2024 growth at 2.4%, almost double forecasts from just three months ago. And with an optimistic Fed holding its expectations for three cuts this year — the most important old number — this confirmation that the economy is expected to stay strong has helped push stocks to new highs.

There’s an old market saw that says lower rates are good for stocks. But so too are a strong job market and a healthy consumer, which are good for profits and, in turn, good for stock prices. Throw in a long-awaited boost in worker productivity and things look even better.

The Fed’s bullish growth projections, even with an expectation that 2025 growth moderates, are a certification from the central bank that the market is right.

While breathless AI energy has boosted the S&P 500, very real earnings buttress these high prices across the index. The job market remains healthy. The consumer is spending. And as a bonus, the Fed doesn’t see these trends as inflationary.

“If what we're getting is a lot of supply and a lot of demand … that supply is actually feeding the demand, because workers are getting paid and they're spending,” Fed Chair Jay Powell said during his press conference this week, likening the economic situation to last year when inflation fell as the economy grew. A strong economy — and strong stock market — are by no means incompatible with Powell’s mandate and mission.

The only fly in the ointment, then, is that money is expensive as long as rates are high, pushing companies towards efficiency (earnings!) rather than chasing growth and continuing the housing market’s frustrations.

So as reporters tried to coax out hints to the Fed’s plans during the press conference, Powell consistently channeled Patrick Swayze in “Roadhouse” in his responses. How will we know when the Fed will cut? “You won't. I'll let you know.”

By now, we all know what we’re waiting for: convincing inflation data, full stop.

And the fact that neither we nor Powell have seen it yet underscores the fact that obsessing over when the next cut will be may not be the best use of our time.

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