Market Ignores Fed Chair Powell’s Comments, Prices in More Interest Rate Cuts

May 4, 2023

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12:52 pm

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12 comments

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Economics

CME Fedwatch data, various dates, chart by Mish

Press Conference Q&A

At the post FOMC press conference, Michael McKee of Bloomberg asked Fed Chair Jerome Powell “Are you ruling out the rate cuts that the market has prices in?“

Powell responded “We on the committee have a view that inflation is going to come down not so quickly. It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t cut rates. Markets from time to time have been pricing in quite rapid reductions in inflation. We factor that in but that’s not our forecast.“

That dialog starts roughly at the 1:30:26 mark.

Who’s Wrong?

The lead chart shows the bond market ignored those comments, going so far as to accelerate the pace of rate cuts.

The pre-FOMC snapshot was about 30 minutes before the meeting and the post-FOMC data was taken many hours after the meeting.

A quick check now at 12:42 AM on May 4 has the weighted average for the March 2024 meeting at 3.79 percent.

For more on the FOMC Meeting, please see Fed Says Banking System is Sound and Resilient, Hikes Interest Rate a Quarter Point

The Fed Forecasts a Recession, Powell Himself Doesn’t

On April 13, I noted Fed Minutes Now Predict a Recession This Year Along With Higher Unemployment

The subject of recession came up a couple of time at the press conference. Powell’s personal opinion is there will not be a recession.

Good luck with that.

This post originated at MishTalk.Com

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12 Comments

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valh

11 months ago

The Fed has already pivoted to a wider stance on QT since October 2022. The current Fed wants to distinguish their policy from previous Fed administrations, so they exclusively adjust FFR. Except inflation is inherent to historically lower rates in long Treasuries, specifically the 10-year Note, since its yield influences mortgage rates. The Fed’s pivot is the reason home price inflation was revamped higher for the previous two months. A reality already known to renters, and homeowners that have recently discovered they owe highly inflated real estate taxes.

Bixbyte

11 months ago

Morons continue The News Story that this is the last interest rate hike. They wear blinkers. The Target is 2% inflation. And we are at 5% Inflation.

Jojo

11 months ago

The FED is not like a bouncing ball. It is not going to reverse course and lower rates until it has at least a 6 month plateau of flat inflation numbers in the 3% range.

Billy

11 months ago

In the world of MMT, you can always inflate your debt away then double speak and pretend that it wasn’t you that caused it in the first place.

Makes you wonder if MMT stands for Marxist Monetary Theory.

Matt3

11 months ago

I think the market is calling BS on the banks being resilient and stable. If the Fed doesn’t cut, they will use other tools (a new form of QE) to help banks. I think we can count on the Fed to be wrong with any predictions and mostly wrong on policies.

TexasTim65

11 months ago

Reply to Matt3

The problem is that ‘someone’ has to lose.

Banks bought 10 year US government debt at 1 and 2%

Those Banks used that 1-2% interest to pay .5% or less on savings accounts.

Now that rates are 5%, people are pulling their savings accounts making .5% and putting them in banks or money markets that pay say 3 or 4%

So the bank can’t cover the deposits being withdrawn unless they sell the government debt at a big loss (after all who wants 1 or 2% in a 5% world). So the banks are going to go under.

If they step in with QE, they are effectively printing *more* money (to pay off the depositors) which is going to send inflation to the moon (the very thing they are trying to get under control). If they don’t step in Banks go under. The other option is monetizing the existing 1-2% debt and rolling it back out at 4-5% but that would make government interest payments go to the moon forcing massive cuts in spending. So someone has to lose somewhere (banks, the government, consumers etc). Place your bets and take your chances…

KidHorn

11 months ago

Reply to TexasTim65

My guess is the FED will loan the banks money at PAR using their securities as collateral. Not sure if this will expand the money supply or not.

TexasTim65

11 months ago

Reply to KidHorn

That puts the losses on the Fed since it means the Fed is effectively buying the bonds for par and holding them to maturation at 1-2% interest in a 4-5% world.

Billy

11 months ago

Reply to Matt3

I’m thinking that the Fed is causing banks to fail so the government gets to pick and choose which ones they get to save or give great deals to the big boys.

HippyDippy

11 months ago

Reply to Billy

Bingo! One bank to rule them all!

MPO45v2

11 months ago

The Fed has been firm about raising rates and ‘the market’ has been wrong so given recent history, I think the Fed won’t be pausing or lowering rates anytime soon. Of course if a default happens or other mayhem ensues than all bets are off the table.

The Fed knows there is a demographic crisis, it mentioned it a few FOMC meetings ago, they know millions of people are leaving the labor force every year and not enough young people to back fill. If there aren’t enough people to work then there won’t be enough taxes to pay for the debt, to borrow or to lend to much less grow businesses. There are so many things that will spawn from bad demographics that I can’t cover them all here but every single business, government entity and person will be impacted mostly negatively.

KidHorn

11 months ago

At some point, the rate will be lower than now. So they’ll cut at some point. But I doubt they’ll ever go back to close to 0. Now they know inflation is a real concern.

Market Ignores Fed Chair Powell’s Comments, Prices in More Interest Rate Cuts

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