The Fed Will Cut Rates In March, Or Else

Seekingalpha01-16

Stocks have rebounded, but the market has been consolidating sideways due to geopolitical tensions and concerns about inflation.Investors fear that the Federal Reserve may delay easing monetary policy...

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Bodoh
01-16
Bodoh
3-5% pullback = buying opportunity?! Would the wars have stopped by then?

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Fueling that consolidation are concerns about the escalation in geopolitical tensions in the Middle East with the US and UK launching airstrikes on Houthi targets to dissuade the group from further attacks on ships in the Red Sea. There are also worries that this will elevate transportation costs and oil prices, slowing the Fed’s progress in bringing down the rate of inflation. I don’t see these developments undermining the disinflationary trend, a soft landing in the US, or the ongoing bull market. Therefore, any pullbacks that result should be viewed as opportunities to invest, as they were in February and October of last year.Edward JonesA greater concern for me would be a delay by the Federal Reserve in starting to ease what is now an overly restrictive monetary policy. There was consternation that this might happen after last week’s Consumer Price Index report for December, which was modestly hotter than expectations. Fears dissipated the next day when the Producer Price Index decreased 0.1% for the third month in a row, while the core rate was unchanged. The core rate is up just 1.8% over the past year, which is back to the level we last saw at the end of 2020. This is why the 2-year Treasury yield, which is viewed as a proxy for where the Fed’s benchmark rate will stand approximately one year from now, fell to 4.14%. The bond market is reaffirming the consensus view that the Fed will ease policy as soon as March and lower the Fed funds rates by at least 100 basis points this year.BloombergThe bond market gave us the same insight when the Fed’s target rate was still near zero by lifting the 2-year yield nine months in advance of the Fed’s first rate hike in March 2022. The 2-year yield was already up to 1.6% when that rate hike came, and it approached 5% as early as November 2022.StockchartsIt is doing the same thing in reverse by falling from its peak of 5.19% to the recent low of 4.14% well in advance of the Fed’s first rate cut. Note that the Fed received tremendous criticism for waiting too long to start raising rates, as policy changes take months to filter through the economy. Chairman Powell knows this, and he does not want to make the same mistake on the way down.ForbesThe rate of inflation was near its peak of 9% once the Fed started to raise rates from the zero-bound. If it had started a year earlier, I seriously doubt we would have seen 9%. Yet now we have fallen to 3-4% and the policy is still at its most restrictive. If the Fed starts to reduce short-term rates in March and continues at every meeting thereafter, it will be approaching a neutral rate of 3.00-3.5% by the time the rate of inflation is approaching its target of 2%. If it waits until June, I think it will be repeating its previous error. I think Chairman Powell will move in March, as the market is predicting, which should solidify the soft landing in 2024.Edward JonesI expect this period of consolidation, which may culminate in pullback of 3-5% in the S&P 500 from its 52-week high, to ensue during earnings season, as investors debate earnings growth, the timing of the first rate cut, and the sustainability of the expansion. I view any pullback as an opportunity to add risk to portfolios, as I did in February and October of last year. If the Fed decides to delay cutting rates in March, I will have to reassess my outlook.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":263704907989072,"gmtCreate":1705384923935,"gmtModify":1705384928598,"author":{"id":"3559859558754319","authorId":"3559859558754319","name":"Bodoh","avatar":"https://static.tigerbbs.com/349218ea2852130ca86ce660b4aa2d59","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"3559859558754319","authorIdStr":"3559859558754319"},"htmlText":"3-5% pullback = buying opportunity?! Would the wars have stopped by then?","listText":"3-5% pullback = buying opportunity?! Would the wars have stopped by then?","text":"3-5% pullback = buying opportunity?! 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