December - US market rally, Interest the same?
The last FOMC meeting for 2023 will be held on coming Dec 12-13.
The meeting’s objective remains unchanged; that is for the voting members to discuss and decide whether to hold the current Fed funds rate (525 - 550), status quo or to adjust it.
Even before the Central bankers have a chance to deliberate, US Hedge funds managers and Wall Street traders have took it upon themselves, to look beyond into 2024 and started forecasting on when the Feds will start to bring down interest rates. LOL!
Latest CME FedWatch tool, for June 2024. (see below)
Markets are now pricing in a 92% chance of a rate cut by the end of the June 2024 meeting, up from a 60% chance a month ago.
US market performances - 27 Nov to 01 Dec
Wall Street’s “hallucination” of a falling interest by the Fed, was most obvious on Thu, 30 Nov 2023, after US Core PCE (personal consumption expenditure) for October 2023 was released in the morning.
October Core PCE YoY was 3.5% versus September’s data of 3.7% making it the 4th consecutive month of decline. (see below)
It led US market to close off November 2023 on a euphoric high. (see above)
$DJIA(.DJI)$ was up +0.82% to 36,245.50, $S&P 500(.SPX)$ was up +0.59% to 4,594.63 and $NASDAQ(.IXIC)$ up +0.55% to 14,305.03.
Thankfully, no matter how buoyant and aggressive the wolves of Wall Street are, the Fed remained steadfast and went about their usual duties of socializing with the media.
They have completed their tour of “duties” before the onset of FOMC blackout period, that stretches from Sat, 02 Dec to Thu, 14 Dec.
In the course of their merry making, the Fed officials have shifted their tone and inched closer to the conversation markets have long been having — When will the central bank begin cutting interest rates?
A litany of policymakers — including six who will vote on policy next year — indicated in recent days that they were comfortable with keeping rates steady at their December meeting.
Citing that they have been encouraged by the downwards trend in inflation and data showing a slowing economy.
Who Said What?
Fed Governor Christopher Waller said he is “increasingly confident that policy is well positioned to slow the economy and get inflation back to 2%” (see above)
Waller added that he could see a point where the Fed might start lowering rates if inflation continues to ease over the next 3 to 5 months.
Fed official Michelle Bowman speech at Salt Lake City, Utah was “darker” in tone. (see above)
She said “ …. we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2 per cent target in a timely way”.
However, she did buffer it with “However, monetary policy is not on a preset course, and I will continue to closely watch the incoming data as I assess the implications for the economic outlook and the appropriate path of monetary policy”.
Chicago Fed President Austan Goolsbee voiced concerns about keeping rates "too high for too long." (see above)
Once you believe you are on path to 2% inflation, amount of restrictiveness needs to be less.
Data will determine how fast we go.
New York Fed President John Williams iterated that the restrictive policy will remain for a while until inflation moves down sustainably, which he expects to happen over the next two years.
Fed may need to lower interest rates in 2024 or 2025 to prevent real interest rates from rising further, that would be inconsistent with the Fed’s goals.
Further rate hikes is an open question and it depends on the data.
The monetary policy is in a good place right now.
Atlanta Fed President Raphael Bostic said he expects US growth to slow and inflation to continue to ease on the back of tight monetary policy.
He believes the full effects of restrictive policy is yet to be seen. This is another reason he thinks there would be further cooling of economic activity and inflation.
Additionally, the "good news" is that while the economy slows, it is not doing so rapidly that it signals a recession.
Cleveland Fed President Loretta Mester commented that
“Monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions.
It also allows them to judge whether policy is well calibrated to ensure that inflation is on a timely path back to 2%.”
Richmond Fed President Thomas Barkin said he’s not ready to commit to a particular policy path with so much uncertainty in the air.
He called the possibility of easing policy and cutting rates “a forecasting question” that he’s not ready to answer.
His parting comment on a worst-case scenario was “if inflation is going to flare back up, the Fed would want to have the option of doing more on rates”.
Finally, Fed Chairman Jerome Powell who spoke at Atlanta, Spelman College also weigh in on the same topic.
On Fri, 01 Dec 2023, he pushed back on market expectations for aggressive interest rate cuts ahead.
He said “It would be premature to conclude with confidence that (a) the Fed have achieved a sufficiently restrictive stance, or (b) to speculate on when policy might ease,” Powell said in a speech.
Mr Powell acknowledged that inflation “is moving in the right direction”.
How does Fed’s socialization stack against its Economic Forecast?
In my 03 Oct 2023 post, S&P 500 in recession, soft landing or golden path ? — click title to read details !, I have shared the Fed’s Economic Forecast with my readers. (see below)
The Fed has made many forecasts / predictions in above summary tables.
Some of the factors include (a) change in real GDP, (b) unemployment rate, (c) PCE inflation and including (d) Fed funds rates.
For this post, focus centres on Federal funds rates (Red box). (see above)
For 2023, interest rate is forecasted to remain elevated at 5.6%, dipping marginally in 2024.
More significant interest rates reduction takes place in 2025 and 2026 only.
Fed official, John Williams latest socialization (see above), painted a vaguely similar picture.
Looks like the Fed’s economic forecast is a go-to reference material.
Reuter’s profile of Fed official
Just as it is interesting to see how “ aggressive passive” Wall Street is, piling pressure in an attempt to drum up support and get the Fed to start cutting interest rate, Reuters had a more novel way of doing things. (see below)
Reuters has profiled the Fed officials heading in the past FOMC meetings.
What I have chosen to interpret is that the number of “hawkish” officials have reduced by about -50% from where it first started back in December 2022.
While the more moderated “centrist” have gained in strenght from a mere “1” in December 2022 to “7” in the last FOMC meeting. This is 43.75% of the voting panel’s attitude.
Going into the last FOMC of the year, it is not too difficult to predict the Fed’s overall stance.
My viewpoints: (mine and mine only)
With October 2023’s — Core CPI and Core PCE falling for x-consecutive months, it is a clear indication that the elevated interest rate is working through the layers of business structure.
Other official reports released, support a cooling inflation as well.
All these should convince the FOMC to keep existing interest rates (“525 to 550”) status quo to close out 2023.
Historically, with a confirmed status quo on interest rate, US market tended to rally further upon confirmation.
On 13 Dec 2023, it should not be any different this time round.
However, I do partially agree with Hedge Funds manager Bill Ackman argument that the Fed needs to adjust interest rates down, when monthly review of official data points to falling inflation.
This is “responsible governance” to do what is best for US economy, its citizens and the business community.
Do you think the Fed will keep current interest rate unchanged in December 2023?
Do you think the Fed will begin to cut interest rates in 2024 and when?
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