The market somehow misinterpreted the Fed’s initial statement. Then Powell poured cold water on the idea of March rate cuts. But wait, it gets more interesting …. 
I was watching CME Fedwatch to see the market’s reaction to the FOMC statement “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
I was surprised to see the odds of a March rate cut rise. Apologies offered but I failed to catch a screenshot until after the press conference but the above chart explains.
Yield on the 10-year note rose in a worry over future inflation if the Fed cut too soon. Powell took care of that at the press conference (Or did he? updated charts below).
The Fed Intends to Move Carefully on Interest Rate Cuts
I noted pertinent press conference clips in my previous post The Fed Intends to Move Carefully on Interest Rate Cuts
- “The Committee Intends to move carefully,” and the Fed is data dependent. “It depends on the economy. The Fed will react to the data.”
- In one of his more accurate assessments “consumers are right to be unhappy [about inflation],” said Powell.
- In the key moment at the press conference, Powell stated “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do that.”
March Cut Not the Base Case
A March cut is “probably not the most likely or what we could call the base case,” said Powell.
The rate cut odds changed noticeably.
Rate Cut Odds for March as of 2:33 PM CT
I failed to capture the pre-press conference image but I recall seeing rate cut odds near 50 percent. That would be consistent with the lead image reaction.
A month ago, the odds of a rate cut were 73.4 percent. Now they are down to 36.4 percent.
Well strike that. Pavlov must be ringing a bell somewhere. The above image is as of 2:33 CT.
Rate Cut Odds for March as of 6:37 PM CT
Poof. The market has already given up on the pause through March theory.
And treasury yields confirm.
Yield on the 10-year note again rose in a worry over future inflation if the Fed cut too soon. If someone has a different interpretation I am willing to consider it.
December is even more amusing.
Target Rate Probabilities for December 2024
Yesterday, the weighted average rate for December was 4.03 percent.
Now, the weighted average rate for December was 3.89 percent, pricing in about half of an additional rate cut, in the range 3.75 to 4.00 percent.
In total, the market now expects six full rate cuts. The Fed thinks it will be three!
The market refuses to take Powell at his word for more than a few hours. And long duration bonds are not happy with the idea of rate cuts.
Why the Solid Disbelief in Powell?
One possible explanation is the market expects a miserable jobs report on Friday. We will see.
ADP Reports an Increase of 107,000 Private Payrolls
The hiring slowdown of 2023 spilled into January, and pressure on wages continues to ease. The pay premium for job-switchers shrank to a new low last month.
On the jobs front, ADP Reports an Increase of 107,000 Private Payrolls, BLS Reports Friday
ADP reports the premium for job switching is dropping rapidly. That show up in the huge slide in quits.
In advance, I commented Job Openings Rise in December But Quits Tell the Real Story
Meanwhile, the Fed wants more data. We will have that on Friday.
Don’t be silly Mish, everyone knows the Fed follows the bond market, not the other way round.
The Fed does not follow the bond market.
That is the subject of my favorite all time post
The Fed Uncertainty Principle
https://mishtalk.com/economics/the-fed-is-uncertain-about-uncertainty-so-why-the-forward-guidance/
BTW if the Fed followed the market then why not eliminate the Fed and let the market work
“Yield on the 10-year note again rose in a worry over future inflation if the Fed cut too soon. If someone has a different interpretation I am willing to consider it.”
?????
$TNX (StockCharts yield on 10-year) was down yesterday and it is down again today.
It has been in a downtrend since a local top on January 19th.
I would guess the rate cuts will probably start in the fall, before the elections, with the excuse they have to save the economy.
People just don’t believe the economy is expanding. It may well be a shell game, but will people really figure that out? I mean Joe Q Public not people who take time to come to sites like Mish’s. Look at it this way, GDP is expanding at a 3% annualized rate (in the most recent report) and we know debt is expanding at around 5% annual, so that’s really 2% contraction. Is that sustainable in any way?
“Why the Solid Disbelief in Powell?”
Maybe the expectation of him folding like a cheap suit.
“consumers are right to be unhappy [about inflation],” said Powell.
A side effect of that ramp up of federal debt.
I hate to tell you this, but you’ve been brilliant over the last couple of weeks. You’ve been giving us a healthy dose of ‘reality’ orientation. Sometimes yah gotta hear the truth….
Why “hate to tell” him that? Mish will have runs of Brilliance, and then sometimes his take will not be so brilliant. Either way, Mish provokes us to THINK again or THINK the first time about these Financial and Cultural issues. “May you live in interesting times.” I come here daily, for Mish’s content AND my Brethrens’ comments.
I am interested in your Take, Charles and the others. I may not agree, and poke a bit of fun, but why would I NOT be engaged because these issues, the Politics, the Econ, the FED and all else between DO have an impact on our lives.
I wish you and Mish and all the other people here to have HAPPY, productive and thoughtful lives.
Thank you for saying what I clicked here to say (why the ‘hate to tell you’).
I disagree with plenty of Mish’s analysis and when we disagree I’m quite sure he is more often owning the better take. BUT, in this filter bubble age, you need to work harder than ever to balance your media intake. If you don’t work at it, you’ll be told what you already believe, and rarely challenged by what you take in. I spent 80-90% of my time reading on sites where I don’t agree with the owner’s basic philosophy. It’s healthy
“These exogenous-geopolitical-black-swan-events have forced us into this totally-not-predictable decision to cut rates. But it definitely wasn’t the bond market or our unspoken mandate to support Dementia Man’s re-election campaign.” -The Fed, March 2024
Based on the charts I see I think the FED will do – at least – one rate cut in march. Perhaps the FED will already cut in february. Markets will tell us in advance. No matter what more rate cuts will follow in the coming weeks & months.
There is no scheduled Fed meeting in February. The next one on the calendar is March 19-20.
Approximate 4.5% FED Funds Rate Dec 2024? Most likely. A war with Iran may not even allow that low of a rate.
Hi, Sunriver (Oregon?)….I agree and let’s lump ALL of these Military Industrial Shenanigans together: Gaza/Israel, Yemen, Lebanon, Ukraine/Russia/NATO, and China/Taiwan and ultimately IRAN which is being painted as a Country of Bumpkins. I have Iranian Friends, regular folks, and I can tell you that you would not be able to tell the difference between their lives and ours.
Remember, everyone, the BULLSHIT coming out of our Government (“Wars on Terror”) and the response to us, in the form of REAL PEOPLE going into the TERROR that the USA foists upon THEM, are two different sides.
WARS KILL REGULAR PEOPLE and the M.I.C. coldly and in a calculated manner, PROFITS from it. Look at Tom Cotton, McConnell, BidenCo, ClintonCo, HUNTERCO, and TrumpCO: they are ALL IN ON IT and regular people die and then they call that “collateral damage” as if it was a mistake when an entire Wedding is killed by Drones (Thank you, Obama, MR. NOBEL).
Be sure to give a hat tip to Senator Grahm.
Fed rates vis a vis the 10 yr. are irrelevant. It is the 3 month Bill that matters. And it (market rate) needs to fall at lower limit or below the current Fed range before the Fed will cut. Superimpose the 3 month rate over the Fed rate on a long term chart for proof. The Market controls the Fed.
If this were true you wouldn’t see WILD swings in the bond “market” every FED day or anytime Jerome (100x weaker than Arthur Burns) speaks.
The FED wags every dogs tail including the now controlled algo bond fraud “market”