Name: Will the Fed Cut Interest Rates in March: Breaking Down the Latest FOMC Meeting
Uploaded: 2024-01-31T21:42:00Z
Duration: 17 min 22 s
Description: Inflation is falling and markets show that investors are betting that interest rates will fall sharply this year. WSJ's Dion Rabouin breaks down Chair Jerome Powell’s comments at the January FOMC meeting and the roadmap for what comes next. Photo: Kevin Lamarque/Reuter

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Inflation is falling and markets show that investors are betting that interest rates will fall sharply this year. WSJ's Dion Rabouin breaks down Chair Jerome Powell’s comments at the January FOMC meeting and the roadmap for what comes next. Photo: Kevin Lamarque/Reuter

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Will the Fed Cut Interest Rates in March: Breaking Down the Latest FOMC Meeting

Hey, everyone. Welcome, welcome, welcome, welcome into Market Takes. Man, you know, it's my favorite day of the month. 10 times a year we get to do this. We get to sit around here and chop up what just happened at the FOMC meeting. I am Dion Rabouin, reporter at the Wall Street Journal, and we are breaking down, examining, unpacking, opening up everything that happened at the Fed meeting. We're gonna be talking about the FOMC statement. We're gonna be talking about what Fed chair Jerome Powell said. We're gonna be talking about how the market reacted. We are gonna get into all of that right here on Market Takes. I know you could have been anywhere in the world, but you're here with me and I appreciate that. Listen, today we are gonna talk about what the Fed's decision was, like I said, break down that statement and the press conference. We're gonna talk about Chair Powell's remarks. We're gonna talk about how the markets reacted. Very interesting market reactions today. I'm excited to get into that. Of course, we're gonna talk about the big picture takeaway and we are going to talk about what comes next because as you know here on Market Takes, we are always looking forward, even though it is backward looking data. Although today with the Fed, this is all about what comes in. It's all about what's happening in March. So listen, let's get into it. First thing I wanna do here is throw up on your screen a chart of the Fed funds rate so you can see just where we are historically. Now, the Fed kept rates unchanged at this meeting between 5.25 and 5.5%. Again, this is the highest rates have been in about 22 years. You see where we are now, that's on the right-hand side of your screen. That's higher than we've been any time. So going all the way back to 2001, we were in that recession or going into that recession, going on 23 years, but really this chart is just illustrating how high the Fed funds rate has gone. And now that we're at that high level, it looks like we're kinda starting to taper. And what folks in the market had been expecting was this meeting was gonna be the meeting that sets up rate cuts, so for those rates to start coming down for that line to start moving lower. Well, Fed Chair Jerome Powell said, "Hold on, wait a minute, let me talk to you." And it started with the statement. So I wanna do something a little new here. Well, let's throw up the statement on your screen so you can take a look at it. And I wanted to highlight, I've got highlighted here, a couple of the most important changes. These things were not in the statement in December and they were added this time. "The committee judges that the risk to achieving its employment and inflation goals are moving into better balance." Oh, that's nice. "The economic outlook is uncertain, and the committee remains highly attentive to inflation risks." That was an add. But the biggest add here, the thing that really set the table for what was to come during this press conference and why we got the market action that we did was this sentence right here. "The committee does not expect, 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%." Does not expect. So here's why that matters. A lot of what's been baked into markets, a lot of that bullishness, a lot of the 25% gain we saw for the S&P 500 last year, a lot of the big start to 2024 that we saw, that was baked in the Fed was gonna be cutting rates. And what markets had predicted was that the Fed was gonna start cutting rates as soon as March. That's its next meeting. So to do that, well the Fed can't just come out and surprise the markets. "Ha ha, surprise rate cut." No, the Fed's gonna start setting things up. It's gonna start setting the table. They're gonna start with their policy meeting. They're gonna start with their communications. They're gonna start in their media appearances. We talked to former St. Louis Fed President James Bullard a couple months ago on the podcast. We talked, or sorry, a couple months, a couple weeks ago. We talked to San Francisco Fed President Mary Daly. We talked to Chicago Fed President Austin Goolsbee. And when they come out and they speak with media and they do those things, they kinda start to set the table and say, "Hey, here's what could be coming. Be on the lookout. We're thinking about this. We're not making any decisions yet, but here's what we're thinking about." This statement right here makes it clear we are not cutting rates in March. And they're not gonna say, they're not gonna say absolutely because the Fed doesn't wanna be boxed in. The Fed doesn't want to say they're gonna do something, then things change, economic data change, the market changes, and now they can't do what they said. They wanna get the market set up by dropping little hints. And this hint right here, "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%," that sustainably word Fed Chair Powell highlighted again and again in his press conference, we'll get into that in just a minute. Also important to note in that statement, what was removed, they removed all references to the quote sound and resilient banking system of the United States. That was interesting. They had thrown that in there in case folks were getting a little worried about the banking system. They had said in their past statement, you know, the banking system is fine. It's sound and resilient. We think everything's great. That's out of there. Could be read as a sign that they don't think they need to talk about it anymore. That it's not something they feel like they need to really convince the public of. That that doesn't need to be in the statement again. You can read that any way you want, but that was also removed from the statement. Additional policy firming, that language was removed. So that was why you saw maybe some moves from the market where at first it was like, oh, okay, well maybe this is a dovish hike, which, you know, is generally gonna push risk assets like stocks up, push bond prices up, meaning push yields down. That's what you saw there. But then as you get into the statement, you read that statement I read to you or that sentence I read to you and that sort of changed things. Interestingly enough, the Fed fund futures market was actually pricing in a higher chance of a cut by March as soon as this statement came out. By the time Fed Chair Powell finished with his press conference, that had been wiped out, the likelihood of a March cut is almost all the way off the table. Investors are no longer betting on that. So the press conference really, I think the table was set by the statement, but the press conference, if there was any doubt in anyone's mind about what the Fed was trying to communicate, investors got the message and the message was these rate cuts ain't coming in March, get ready for May. We wanna cut rates. We're getting ready to cut rates. We're gearing up to cut rates. It's probably coming, it's probably coming, but not in March, so cool it. That was kinda what we got from the statement and what we got from Fed Chair Jerome Powell at the press conference. Basically the big picture at Chair Powell's press conference, as we step back here and watch the whole thing right here in the studio. The chairman and the committee feel good about the economy. They just wanna see more. We've seen inflation coming down, we've seen jobs holding up, we've seen these things that we need to look at that are moving in the direction we wanna see. We just need to see more. And that was really the message that Fed Chair Jerome Powell was trying to communicate through every question he answered from the media today. In fact, he was even tapping his pen. I don't think I've ever seen the chairman tapping his pen when he's making a point. He was kinda, "Listen, let me tell you what's going on. The committee intends to move carefully, data dependent, meeting by meeting." And he said, this was very interesting, "Based on the meeting today, I would tell you that I don't think it's likely the committee will have the confidence to," and this is my words, not his, but to cut rates in March. He phrased it more delicately in a way that no one would really understand. But what he was saying was, the committee doesn't have the confidence right now to set up that rate cut for March. You can go back, you can check the tape, find out exactly what he said, but more or less what he was saying was we don't have the confidence to cut in March. And he went on to say, that's probably not the most likely instance. Again, those rate cuts in March, which the market had been pricing in. So when we talk about markets here in just a minute, you are gonna see the reaction to Fed Chair Powell's press conference and to that statement from the Fed. That actually when he was responding was in reference to a, sorry, actually I'm talking about the wrong thing. The other really strong market reaction was to Fed Chair Powell saying that he doesn't think the market has achieved this soft landing. He said quote, "I wouldn't say we've achieved that," referring to the soft landing. "Certainly we're encouraged by the progress, but we're not declaring victory at this point. We think we've got a ways to go." A ways to go means rates stay high, you don't get those rate cuts. Rates continue to hold up through March, likely through at least May, which is what investors are now pricing in. But that was the big takeaway here. We are unlikely to get those cuts in March based on the data that we have so far, based on the information that the Fed has received and based on what's going on in the markets. It's looking like based on what Fed Chair Powell and his colleagues discussed, based on what he told us at this press conference, we are not getting a rate cut for March and that changes the thesis in the markets in a significant way. Let's talk about really quickly, let's get to the markets. I wanna throw up here on the markets. I've been talking about what's going on and I want you guys to see what I'm talking about. Look at the Dow, down 0.82% today, but you see where the market kinda went up, okay? The statement came out right around 2:00. That's right around here, right? Market said, "Oh, okay, this could be nice, maybe those rate cuts are coming." And then boom, nope, no rate cuts. And we get this sell off where the Dow is down 0.82%. Let's look at the Nasdaq, down about 2.5 or 2.25%. Similar thing. Statement comes out right around 2:00, market gets a little excited. Okay, maybe there's some good stuff in here. Maybe we get those rate cuts. Nope, we're not getting those rate cuts. And you see the stock market just sell off. Investors were pricing in pretty heavily those rate cuts. And you see a similar reaction when you're looking in the bond market. Now, what we've really seen and what's been really interesting is the way that bonds have now moved back down, especially this two-year note, right? You saw a lot of movement during the press conference. This is the press conference right here. You're seeing bond yields go up, go down. This two year note is very tied to what investors think is gonna happen with Fed policy. And you see it going up, basically up means they think that rates are gonna stay high. Down means that rates could come back down. And that's where you see, you see that push and pull based on what Fed Chair Powell said. And what you see ultimately here as we get to market close is the market saying, "All right, we don't think that rate cut is coming in March. And in fact, maybe we're not gonna get as many rate cuts this year." When you look at the Fed funds futures market, you are seeing now a repricing, the market had been expecting six rate cuts from the Fed this year. Now pricing in only five, so that's pretty significant. And now you've gotta kinda reprice all your assets. So as you look here, the most significant move was in the three-year note. That's kinda between Fed policy and the overall economy. But as you get out here to the 30-year bond, that's where you seethe least amount of yield change. That's only about seven basis points on the yield. One other thing I thought was really interesting, you didn't see a big reaction from a lot of markets, but you did see it here in the currency market. You see in the euro there, again right around that 2:00 time sell off and that's the euro against the Dollar. So as the euro is falling right here, you're seeing the dollar gaining. You see it here in the US dollar index, the dollar moving in the opposite direction right around that 2:00 timeframe when investors really priced in the Powell speech and what he was saying at that press conference, you see the dollar picking up and rising pretty strongly. Cryptocurrency, along with the market, I think this is really just a risk asset story, but usually crypto not that moved by what happens in terms of Fed policy and on the markets. Well, we see it again right around here at 2:00, you see just the sell off in Bitcoin and you're seeing it across the crypto landscape. Commodities, not a big reaction, generally speaking, not a big reaction to the Fed. But gold, look at gold, gold had been up huge today, going up over that $2,070 an ounce level. And then as we get closer to the Fed meeting, it starts coming down, coming down. And then you see this big move again right here around 2:00. Investors saying, "Okay, we're not getting that rate cut. Gold price is coming down." That I thought was a very interesting move. And again, what we're seeing from the market, just really illustrating the investor reactions to the reality that that rate cut in March is unlikely, highly unlikely to come because this isn't, you know, innuendo. This isn't rumors. This is the Fed chairman coming at you and saying at his press conference, "Look, I don't know that we've achieved that soft landing. We think we've got a ways to go." He's saying, "I don't think it's likely that the committee will have the confidence to cut in March. That's probably not the most likely instance." When you're hearing it from the horse's mouth, the market say, "Hey, you know what, that's it. Let's sell these stocks. Let's get out some of these risk assets. Let's buy bonds." Because inflation, we think that rates, especially tied to that two-year, are going to be lower. That's what this is all about. So what we got from the statement, what we got from the press conference, that's telling us that the Fed is gearing up for rate cuts. The Fed is still expecting to cut rates this year. You heard Fed Chair Jerome Powell at his press conference say, "Well listen, on our summary of economic projections, we are still expecting most of the committee three rate cuts this year. We think we're still gonna lower rates. We think that's happening. We think inflation's getting back towards 2%, which is our goal, but we're not convinced yet." It's a little bit like a little kid. You take him to a rollercoaster, he sees the rollercoaster, he's like, Man, I wanna ride that rollercoaster, but I don't know." Let me see it go one more time. Let me see it go one more time." That's the Fed, they say, "Oh, okay, PCE inflation falling down below 3%. We like that, but let me see it one more time. Okay, we're getting back down from 6%. Let's see it one more time." In fact, you know what, let's throw up a chart here so you can see what I'm talking about when we talk about PCE inflation. What we're seeing and what we have seen in terms of the inflation rate is that inflation rate consistently coming down. That's what the Fed's looking at, that's what the Fed's been seeing, but they want to see it continue. So let's throw a chart up here on your screen of that inflation, the PCE price index, and again, going back to mid 2022, you're seeing a consistent move lower, consistent move downward. But what Fed Chair Powell said, and he was asked this directly, are you worried about inflation picking back up? He said, "Well, that's not our biggest worry. Our biggest worry right now is that inflation stays at this level, that it doesn't get back down to 2%." He said, "We don't want inflation to just tap 2%, we don't want it to touch 2%, we want it to get down to 2% and stay there and we wanna see more evidence. We wanna see these levels continue to move back down to 2% before we feel comfortable with cutting rates." And in their estimation, based on what we heard from the chairman today, there's not enough evidence just yet. And again, this PCE charge just illustrates the way that inflation's been moving. It's moving the way the Fed wants it to, but they want to see more, they wanna see more, they wanna see inflation continue to come back down. Now, he was also asked, the Fed chairman, about the labor market and what could happen in terms of if they start to see some weakness in labor market. And let's throw a chart up here on your screen of what we've been seeing from the labor market. This is the US non-farm payrolls report, AKA, the Jobs Report, which you know if you watch Market Takes, that's actually been picking up. You're seeing the last three months on your screen. You see there, it looked like we were kinda starting to move down toward that zero number in October, but instead November was higher, December was higher. We have seen consistently higher numbers on that Jobs Report, but the chairman did say, if we do start to see some significant deceleration, if we start to see the labor market falling apart, really start to deteriorate, that would be another reason for them to lower rates. But again, when you're looking at this chart up here on your screen, which is what the Fed's looking at, there's no signs of deterioration. There's signs of strength. There's signs that the labor market might actually be picking up, might be gaining some strength, might be gaining ground and getting stronger. And that again is going to keep the Fed on pause. Keep them from cutting those rates as fast as Wall Street might want them to. So this chart, this chart right here, just illustrating the strong jobs number and least on the headline number, least on the headline, it looks pretty good, the jobs number, but the Fed doesn't have a lot of reasons based on what we heard today from the chairman to cut those rates. And so the market not loving that, the market really wanted to see those rate cuts. The market wanted to see Fed Chair Jerome Powell say, "Yeah, you know what, we're ready. Let's make it happen." They didn't say that. What they said is we wanna see more evidence. And so that's gonna put even more of an emphasis on the next pieces of data because the Fed is back to being data dependent. So a strong or a weak inflation report, a strong or a weak Jobs Report, any of those could move markets significantly. And that's why you're gonna wanna be with us right here on Market Takes on Friday. We'll be here in two days, breaking down the Jobs Report for January. We're gonna talk through everything, jobs, wages, we're gonna talk through the effect on inflation, how this gets the Fed moving forward. So we'll be here Friday morning, 10:00 a.m. Eastern. Hope you'll join us for that. Last thing, for more, check out my podcast WSJ's Take on the Week. We cut through the noise to explain the major business and financial moves, major business and financial news that moves markets. Also, you can make smarter investing decisions. Subscribe wherever you get your podcast. That's gonna do it for us here on Market Takes. I am Dion Rabouin, reporter at the Wall Street Journal. We hope you'll come back and do it with us when we see you next time.