The first Federal Reserve meeting of the year left investors stunned. Upon Chairman Jerome Powell’s press conference clarifying yet again that the central bank is not yet ready to pivot to cutting the federal funds rate, the S&P 500 slid 1.61% and the Nasdaq another 2.23%. Odds of a March cut plummeted from nearly 50% to just 31%, with Treasurys futures now pricing in a 2-in-3 chance that interest rates remain at their 23-year high.
Of course, if investors more closely read the Washington Examiner, they would have seen this coming.
The Federal Open Market Committee closed out 2023 with the projection of only three rate cuts throughout 2024. Naturally, investors chomping at the bit decided to take that projection and double their own estimates to six rate cuts, beginning as early as March. This was despite the fact that Powell promised that rate cuts were not yet incoming and that the central bank remained data dependent.
And since the year began, that data has hardly pointed toward a pivot. Despite inflation indeed dropping from its near-double-digit peak in the summer of 2022, consumer price index inflation actually increased at the end of 2023 to 3.4%. The Fed’s preferred inflation measure of core CPI, which strips out the volatile categories of food and energy, closed out 2023 at 3.9% or nearly twice the Fed’s maximum target of 2%. Personal consumption expenditures were flat at 2.6% in December, and core PCE was the only measure that fell, still to the far too high point of 2.9%.
A crucial component of the Fed’s power is not just its actual monetary tools of tightening, reserve requirements, and its own vast balance sheet but also its psychological entrenchment of market expectations. If investors no longer believe the Fed remains committed to bringing inflation back down to that 2% benchmark, a wage-price spiral (along with an asset price spiral) runs the risk of undoing all the hard-fought work of the past two years.
So Powell felt compelled to reiterate the point in even starker terms.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
“We’re looking for greater confidence that inflation is moving sustainable down to 2%,” Powell said during Wednesday’s press conference. “It’s not that we’re looking for better data; it’s that we’re looking for a continuation of the good data that we’ve been seeing.”
Markets may have panicked, but if investors listen to what Powell says rather than projecting their greatest hopes onto the central bank, they’ll realize that nothing except for their own expectations has changed.