Holding the Line

May 2, 2024

Another week full of market moving news – Treasury Refunding Announcement, countless earnings releases, the end of April, and the Federal Reserve’s May rate decision (and by the time you read this, jobs data).

The highlight of this busy week was Wednesday’s rate decision and the following commentary and press conference by Chairman Jerome Powell.

The Federal Open Market Committee (FOMC) once again decided to leave the Fed Funds rate unchanged (range of 5.25- 5.5%, where it has been since July 2023). This came as no surprise to markets, which have drastically reduced their expectations of rate cuts as 2024 has progressed. We find ourselves in a familiar spot – on hold

Markets did react (positively) – at least initially – once Chairman Powell started his prepared remarks and Q&A. You may have been confused by this result – rates stay the same and equities rally and bond yields fall. I had to laugh as I got a text from my mom mid-way thru the press conference saying “how come market going up with rates staying steady. Weird.” Well, a few hours later at the close, markets were down on the news (and then up again early on Thursday as I write this) so if you are confused – just wait a few hours and you may be even more confused these days!

While I can’t be sure of the reasons for the market reaction, my assumption is: the initial positive reaction (while not immediately sustained) was due to the relief that the Fed ultimately remains dovish (ie: in favor of easing monetary policy/lowering rates and not planning to hike rates, which is perhaps the market’s worst fear at this stage).

Here are a few items I viewed as positive from the optimistic commentary of Chairman Powell:

Slowing Quantitative Tightening – Chairman Powell noted that the Fed is going to slow quantitative tightening (process of letting their balance sheet run off) – which is reducing restrictive monetary policy much like rate cuts would

No Stagflation – Chairman Powell firmly rejected the narrative that the economy was entering stagflation (low growth, high inflation), noting that growth remained above the historical trendline and inflation was approaching target (albeit slower than anticipated)

Confident on inflation’s trendline – Powell also stated that the Fed’s base case is that inflation will continue to fall. Recent “stickiness” in inflation has been driven by shelter and car insurance and medical costs – items that have a lag factor that should start to subside on a comparative basis (yet also items that are unlikely to be brought down by “higher for longer” interest rates”). However, Powell did stick firm to the Fed’s intention to get inflation down. When asked about 3% inflation, Powell firmly stated “3% can’t be in a sentence with satisfied.”

Holding the line – perhaps most importantly, Chairman Powell stated he didn’t think it was likely that further rate hikes would be necessary and the Fed stuck to an easing bias. Powell stated he believed current monetary policy to be appropriately restrictive today to get inflation back down to 2% – yet it remained unclear how much time that would take.

All in all, this month’s Fed meeting was a net positive for markets in my view as it took a bad scenario (rate hikes) off the table for now. Uncertainty of the path forward remains – which always makes markets and investors a bit uncomfortable so it’s likely that volatility will remain. We’ve been thru similar times before so you know what to do – zoom out and breath in!

Onward we go,

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