By Randall W. Forsyth
Given the less-than-rational exuberance displayed in the markets, it may appear odd that the Federal Reserve seems all but certain to ease monetary policy further this coming week.
Another quarter-percentage-point cut in the federal-funds target from the current 4.50%-4.75% range, following the Federal Open Market Committee's two-day meeting on Wednesday, had over a 97% probability, according to the CME FedWatch site. That would bring total cuts in the key policy rate to a full percentage point since September.
Lowering rates has added fuel to financial markets, which helped American households' net worth jump by $4.8 trillion in the third quarter, or 2.9%, to a record $168.8 trillion, according to new Fed data released this past week. Most of that, some $2.9 trillion, came from the rise in equities. And with the 5% rise in the S&P 500 index since September, households should see another big gain in the current quarter, notes Michael T. Lewis, who heads the Free Market Inc. economics consultancy.
These positive wealth effects should continue to support consumer spending, which accounts for 68% of the U.S. economy, writes Strategas economist Donald Rissmiller. In addition to the major equity indexes trading near records, overall financial conditions have also eased, with both investment-grade and high-yield bond spreads at historically tight levels.
Indeed, the Fed is likely to cut despite the data, not because of it, add Brean Capital economic advisers John Ryding and Conrad DeQuadros. In addition to the Chicago Fed's National Financial Conditions Index showing the easiest environment since July 2021, they point to a lack of progress in bringing inflation down to the Fed's 2% target, and stable labor market conditions with strong hiring intentions amid increased business optimism. On the last score, the most recent Business Roundtable CEO survey found a marked improvement in outlook and stronger expectations for hiring and capital spending. The National Federation of Independent Business survey released this past week also showed the largest jump in small-business optimism in its 39-year history, they note.
While the Fed is prepared to ease monetary policy further against such a favorable backdrop, U.S. fiscal policy continues to be highly expansionary. The Treasury racked up a deficit of $624 billion in the first two months of the current fiscal year, including $367 billion in November alone. On a rolling basis, the U.S. government borrowed $2.1 trillion over the past 12 months, the nonpartisan Committee for a Responsible Federal Budget pointedly observed this past week.
Uncle Sam would probably welcome some rate relief from the Fed. U.S. interest expenses have risen hockey-stick style to an annual rate of over $1.1 trillion in the third quarter, from $508 billion in the third quarter of 2020. Perhaps the bond market is finally taking note, as the yield on the 30-year Treasury jumped more than a quarter percentage point in the past week, to 4.62%. That translated into a 4.5% price drop in the iShares 20+ Treasury Bond exchange-traded fund (ticker: TLT), which would be equivalent to a nearly 2,000-point plunge in the Dow Jones Industrial Average.
The bond market's restiveness may be seeping into stocks. The major averages wound up mixed on the week, with the S&P 500 off fractionally from the record hit the previous Friday and the Nasdaq Composite up fractionally. But the S&P 500 saw more declining than advancing stocks for 10 straight sessions, the longest streak of negative breadth since Oct. 12, 2000. And the Dow fell for the second straight week, losing 1.8% in the past week.
A few Scrooges seem to be snorting "bah, humbug" to the bulls.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 13, 2024 19:30 ET (00:30 GMT)
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