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Bulls emerging from hibernation

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2023-11-10

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According to futures pricing, many in the huge US markets reckon the Federal Reserve will be cutting interest rates from mid 2024 onwards.

That belief has hardened in the past week as a combination of strong US economic growth, weakening cost pressures and less hawkish comments from the Fed chair, Jay Powell, have increased the chances of rate cuts starting in 2024.

To other economists and analysts, that’s the bulls getting ahead of themselves after being forced into hibernation for much of the past 18 months.

And while a case can be mounted for that (and who wants to talk about 10 year bond yields above 5% anyway, that is all so October and in a now distant past), it would pay to remember that even those mavens on the Fed’s Open Market Committee don’t know everything.

In the most recent ‘dot plot’ issued at the September meeting of the Fed (and updated on December 12 and 13 at the final meeting for 2023), members of the committee forecast at least one rise in the Fed’s key rate by the end of 2023 and then two rate cuts in 2024 (down from the forecast of four in the March meeting’s ‘dot plot’).

Futures markets reckon there’s a 10% chance, at best, for a rate rise at the December meeting, nearly everyone involved in the markets reckons there’s no chance of an increase - even Fed chair Powell who in remarks in Washington at an International Monetary Fund seminar, didn’t provide any sort of hint about a rate rise next month.

So if there’s no rise by the end of this year, what about rate cuts in 2024? Many in the markets cling to that belief but it should be regarded as being as out of date as the ‘one more rate rise in 2023’ estimate from the September ‘dot plot’.

Certainly Powell left his audience in no doubt that the Fed still seems more work to be done in cutting inflation. He aid that inflation is “well above” where the Fed would like to see it.

“My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2 percent has a long way to go,” he said.

"If it becomes appropriate to tighten policy further, we will not hesitate to do so,” he said. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening,” Powell told the seminar.

Powell noted the progress the economy has made. Gross domestic product accelerated at a “quite strong” 4.9% annualized pace in the third quarter, though Powell said the expectation is for growth to “moderate in coming quarters.”

Unemployment remains low, though unemployment rate has risen half a percentage point this year, a move commonly associated with recessions. But first time unemployment benefit claims continue to remain low and job vacancies unexpectedly rose in September.

Powell though noted that the Fed is “attentive” that stronger than expected growth could undermine the fight against inflation and “warrant a response from monetary policy.”

His remarks came late in the session but left some in the markets confused - shares sold off, bond yields rose and the US dollar rose - all because Powell in effect warned markets not to get ahead of the curve on monetary policy and inflation.

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