At the time of writing (April 7) – the market is pricing in three rate cuts this year. I don’t see it. In fact, I think there is a very good chance of NO rate cuts this year. Now that is not a scenario the market is pricing in. However, with inflation likely to remain stubbornly high – where property prices are not falling – and the labor market remains tight – why would the Fed cut? Let’s explore….
"Macro / Economy"
It’s Not If “Long & Variable Lags” Hit… It’s When
Milton Friedman coined the expression “monetary policy operates with long and variable lags”. In the 1970s – he felt it was up to around two years before those effects are felt. Today it’s believed to be sooner – given open transparency of Fed speak and data tools available. But is it? It’s been two years since the Fed’s first hike and we’re just starting to see labor markets soften and consumer demand weaken. Have the full effects of tighter policy been absorbed? I don’t think so.
Consumer Confidence Drops as Delinquencies Continue to Rise
Warren Buffett expressed caution around overpaying in his most recent letter. Jamie Dimon – JP Morgan CEO – said today there’s a 50% chance of recession – with a soft landing slim. News of falling consumer confidence and rising credit delinquencies also hit the tape today. This begs a question: is the consumer in 2024 stronger than what we saw in 2023? My guess is no.
Powell Won’t be Bullied
As we started this year – I felt the market was getting ahead of itself. Not only was the tape approaching an overbought zone – it also assumed as many as six rate cuts (possibly seven) before the end of the year. What’s more – it also priced in that earnings per share (EPS) would grow 12% year on year. It felt like a contradiction. For e.g., either the economy was reeling and needed (emergency) rate cuts; or the economy is expanding strongly (supporting earnings growth)? Today Fed Chair Jay Powell pushed back on the former. Markets should not expect rate cuts as early as March… stocks didn’t like it.
For a full list of posts from 2017…