The Federal Open Market Committee was expected to announce nothing of substance today and it did not disappoint. Its Fed funds target rate remains 5.25%%-5.50%. The balance sheet rolloff continues apace.
Markets have been rallying on speculation that fed funds has reached the peak for this cycle and will turn lower in a few months. At which point they will rally because rates have reached the peak for this cycle and have turned lower.
Does something here not quite add up? Pivot once, rally twice. Nice work if you can get it.
The initial reaction to the FOMC statement was a sharp inflationary spike. The dollar plunged against foreign currencies, commodities, stocks and bonds around the world. This appeared to stem from a revision lower in the anticipated course of interest rates in 2024 in the accompanying dot plot.
Wall Street media don’t acknowledge the plunge of the dollar across asset markets, instead focusing on surging stock and bond prices and falling yields as cause for celebration. Whether it is as good for average Americans as it is for the “1%” is in grave doubt. As we have seen, broad purchasing power losses of the dollar in the asset markets prefigure the same in consumer markets.
The “99%” may find some solace in that initial reactions are hardly final. Sharp post announcement moves frequently prove … well … transitory. We will soon see what Powell contributes in the post meeting press conference. I’m not holding my breath.
The press conference has now concluded, with Powell having done little to rescue the plunging dollar or throw cold water on hot asset markets. Substantively he didn’t break any new ground, reiterating the routine disclaimers about inflation remaining too high while also acknowledging the progress to date. When pressed, he acknowledged the possibility of rate cuts at some point next year. His tone was enough for markets to maintain if not augment their pre-presser moves and for media to declare the heretofore elusive Great Pivot to be at hand.
Treasury yields collapsed across the curve. The dollar index (DXY) plunged by nearly 100 bp. The broad Treasury market (GOVT) surged in price by over 100 bp. US stocks (VTI) tacked on over 150 bp, foreign stocks (VXUS) over 140. Oil (USO) was up more than 160 bp, copper more than 100 bp and gold over 200 bp.
Get ready for another round of bad weather and supply chain disruptions.
Lost in all the noise is the fact that the FOMC actually did nothing. It’s all just speculation about what it might do months from now. As if any plans it makes in December 2023 couldn’t possibly be rendered irrelevant by March 2024.
Could the Fed have given us even the remotest inkling in December 2019 what it did in March 2020?
Not to mention the bond market has been slashing rates for nearly two months. The bond market leads, the Fed follows. Like the Fed itself, Fed-obsessed pundits are chronically behind the curve.