Although the possibility of interest-rate cuts has excited investors, the reality is that the Federal Reserve isn’t likely to cut as soon as expected. That is bad news for markets.
There has been a bit of a party on Wall Street because of the rate-cut hopes. The S&P 500 is up 15% from a low point hit in late October, partly because the headline annual increase in the consumer price index has moderated to almost 3% from a peak of just over 9% in 2022. Diminishing inflation has raised expectations that the Fed will soon cut rates lest the 11 boosts to the fed-funds rate it has rolled out since March 2022 trigger a recession.
Short-term interest rates have fallen in response, making it less expensive for consumers and businesses to borrow and spend.
Prices for interest-rate futures indicate investors expect the Fed to cut rates six times this year, for a total reduction of 1.5 percentage points, with odds of 61% that rates will be cut in March, according to the CME FedWatch Tool.
The problem is that the economy and inflation are still too strong for the Fed to cut rates within the next few months. Inflation is still well above the Fed’s 2% target. The annual percentage gain in headline CPI has started with the numeral 3, a so-called 3 handle, for seven consecutive months.
And not counting energy and food, the gain in CPI was just a tick under 4% in December, showing that inflation is worse for other goods and services. While the Fed’s preferred gauge of inflation, the personal-consumption expenditures price index, rose 2.6% in November, even that is well above target.
That means consumer demand needs to drop a bit more for prices to come down, especially given that consumer companies certainly aren’t aggressively boosting their inventories to increase the supply of goods.
“Incoming macroeconomic data does not support a March cut,” wrote Steve Englander, head of North America macro strategy at Standard Chartered, on Monday.
Investors should remember that although the rate of inflation has fallen, it could head higher again if the Fed eases policy too soon. Short-term rates, as measured by the yield on two-year Treasury debt, have fallen to about 4.3% from a multiyear high of above 5% in October. That could encourage more consumer spending than the Fed wants as it pushes to bring inflation back to 2%.
In 2022, when the Fed began to raise rates, it made clear that its priority was to cool down inflation at the expense of economic growth.
“We’ll be waiting until mid-year 2024 for the Fed to cut,” wrote Thierry Wizman, financial market economist at Macquarie, saying rate cuts aren’t imminent.
If Wizman is right, and Fed policymakers force investors to recognize that reality with their public comments, expect trouble for markets in the near term.
Short-term rates would rise. The two-year Treasury yield would inch higher. Demand for goods and services would suffer, ultimately hurting corporate profits.
In the past few years, the index has largely gained ground when rates fall, trading lower when they rise significantly. Expect more of the same.
Stocks have gotten ahead of themselves. It still isn’t time for rate cuts.
https://www.msn.com/en-us/money/mar...S&cvid=82ce6e86e2c14a45856318700e43e346&ei=14
There has been a bit of a party on Wall Street because of the rate-cut hopes. The S&P 500 is up 15% from a low point hit in late October, partly because the headline annual increase in the consumer price index has moderated to almost 3% from a peak of just over 9% in 2022. Diminishing inflation has raised expectations that the Fed will soon cut rates lest the 11 boosts to the fed-funds rate it has rolled out since March 2022 trigger a recession.
Short-term interest rates have fallen in response, making it less expensive for consumers and businesses to borrow and spend.
Prices for interest-rate futures indicate investors expect the Fed to cut rates six times this year, for a total reduction of 1.5 percentage points, with odds of 61% that rates will be cut in March, according to the CME FedWatch Tool.
The problem is that the economy and inflation are still too strong for the Fed to cut rates within the next few months. Inflation is still well above the Fed’s 2% target. The annual percentage gain in headline CPI has started with the numeral 3, a so-called 3 handle, for seven consecutive months.
And not counting energy and food, the gain in CPI was just a tick under 4% in December, showing that inflation is worse for other goods and services. While the Fed’s preferred gauge of inflation, the personal-consumption expenditures price index, rose 2.6% in November, even that is well above target.
That means consumer demand needs to drop a bit more for prices to come down, especially given that consumer companies certainly aren’t aggressively boosting their inventories to increase the supply of goods.
“Incoming macroeconomic data does not support a March cut,” wrote Steve Englander, head of North America macro strategy at Standard Chartered, on Monday.
Investors should remember that although the rate of inflation has fallen, it could head higher again if the Fed eases policy too soon. Short-term rates, as measured by the yield on two-year Treasury debt, have fallen to about 4.3% from a multiyear high of above 5% in October. That could encourage more consumer spending than the Fed wants as it pushes to bring inflation back to 2%.
In 2022, when the Fed began to raise rates, it made clear that its priority was to cool down inflation at the expense of economic growth.
“We’ll be waiting until mid-year 2024 for the Fed to cut,” wrote Thierry Wizman, financial market economist at Macquarie, saying rate cuts aren’t imminent.
If Wizman is right, and Fed policymakers force investors to recognize that reality with their public comments, expect trouble for markets in the near term.
Short-term rates would rise. The two-year Treasury yield would inch higher. Demand for goods and services would suffer, ultimately hurting corporate profits.
In the past few years, the index has largely gained ground when rates fall, trading lower when they rise significantly. Expect more of the same.
Stocks have gotten ahead of themselves. It still isn’t time for rate cuts.
https://www.msn.com/en-us/money/mar...S&cvid=82ce6e86e2c14a45856318700e43e346&ei=14
