Today was FOMC day. The Fed wrapped their two day meeting with a statement, economic projections, and a press conference.
Everyone in the financial media was hyper-focused on the dot-plot.
While most of the headlines targeted 3 rate cuts still being on the table, I think the bigger news should have been that committee members are starting to embrace higher rates for 2024. Let me bring it into better focus.
Those bottom feeders have all moved higher.
I think it is beginning to dawn on FOMC members that this inflation cycle isn’t done. There were several questions from the press about what the Fed needs to see to feel more confident about lowering interest rates but the fact of the matter is, progress has stalled.
The next few months’ worth of inflation data is going to become extremely important. The CME FedWatch tool continues to anticipate 3 rate cuts with the 1st cut coming in June.
I’m still doubtful we’ll get more than 1.
If the inflation data rolls in and shows that inflation is refusing to come down, we should see volatile, choppy action in the stock market as market participants begin to worry about the future Fed response.
One other thing I picked up from the meeting was the fate of QT. It seems Powell and Co are beginning to see signs that QT is paying off and that excess liquidity in the market is drying up. They plan to slow down the pace of QT because they believe that they’ll be able to accomplish more QT over a longer time period if they go at a slower pace. They think that they need to provide relief to the money markets that have been drawing liquidity from the reverse repo facility. Powell commented on this directly during the Q&A session.
[35:23] “We broadly think that once the overnight repo stabilizes at zero or close to zero, that as the balance sheet shrinks we should expect that reserves will decline, pretty close to dollar for dollar with that.”
There is currently $3.6T in reserve balances with the Fed. This provides a long runway for the Fed to continue the QT program at a slower pace. Powell acknowledged the fact that they were caught with their pants down during the last repo-crisis and know what to watch this time around to prevent another panic.
In summary, no cut for you.
It's been fun watching you call this so correctly while the market remains delusional. And all one had to was believe what Powell was saying all along haha.
Now the trick of it is that fiscal policy is going to keep pushing inflation. That makes it harder for Powell to pivot.
But the fiscal policy is creating government jobs, making it harder to reign in fiscal policy.
What a time to be alive....