As was expected, the Federal Reserve maintained its current target interest rate level of 5.25% - 5.50%
This was never in doubt. Instead, the two big questions were:
- Would Federal Reserve Chairman Jerome Powell sound dovish or hawkish in his live press conference?
- How many rate cuts in 2024 would be penciled into the updated Dot Plot?
Beginning with Powell’s tone, this morning’s cool CPI data set him up for a tough challenge.
Let’s circle back to Luis again, explaining the situation:
Powell is going to have to be a little hawkish... after this, if he sounds dovish... the market is going to get carried away.
Well, Powell gets an “A” if the measuring stick is not throwing cold water on the market’s morning gains.
He maintained an even tone, finding a balance between keeping Wall Street pleased without sounding so dovish that the market got “carried away,” as Luis put it.
Here are a few selected comments from his live press conference that illustrate his balance:
- Inflation has eased substantially from a peak of 7% to 2.7% but is still too high.
- As time has gone by, the question of how restrictive is policy has become one that everyone is asking, and we’re asking it too, and, you know, my answer has been that policy is restrictive. The question of whether it’s sufficiently restrictive is going to be one we know over time.
- “Today’s was certainly a better inflation report than almost anybody expected,” yet Powell added not long after “you don’t want to be too motivated by one single data point.”
Meanwhile, the second big issue was what we’d learn from the updated Dot Plot
To make sure we’re all on the same page, the Dot Plot is a graphical representation reflecting each committee member’s anonymous projection of where they believe rates will be at specific dates in the future. The Fed members update the Dot Plot once every three months.
In both the December and March FOMC meetings, the Dot Plot showed a median forecast of three quarter-point rate cuts in 2024.
Well, today’s updated Dot Plot showed just one rate cut this year. Here’s more from Yahoo! Finance:
The Federal Reserve signaled Wednesday it would lower interest rates just one time this year, down from the three cuts the central bank anticipated in its previous March projection.
Fed officials see the fed funds rate peaking at 5.1% in 2024. That suggests the Fed will cut rates by 0.25%. The Fed has moved in 25-basis-point increments over the last year or so, indicating the central bank expects to cut interest rates one time in 2024.
It’s worth noting that four members still predict no cuts at all this year.
While the number of this year’s projected rate cuts got a haircut, they saw a bump next year. For 2025, the Fed signaled a more aggressive posture, estimating four quarter-point cuts, up from three.
Overall, the Fed sees five total quarter-point cuts penciled in between now and the end of 2025. That’s down from six back in March.
As to unemployment and GDP forecasts, here’s Yahoo! Finance with the details from today’s Summary of Economic Projections (SEP) from the Fed:
Officials see the unemployment rate holding steady at 4.0% in 2024, matching the previous forecast. Unemployment is expected to tick higher to 4.2% in 2025 before coming down to 4.1% in 2026.
The Fed maintained its previous forecast for US economic growth, with the economy expected to grow at an annualized pace of 2.1% this year before ticking down slightly to 2.0% in 2025 and remaining at that level through 2026.
Two final details…
As we noted earlier in this Digest, following this morning’s cool CPI print, the CME Group put odds of at least one quarter-point cut in September at 71.6%, and most traders expected two cuts by December.
However, following the release of the new Dot Plot, the probability of a September cut has fallen to 61.7% (although they’re still clinging to two rate cuts come December).
Things move fast here, to say the least.
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So, where does all of this leave us?
Well, it’s a win for the bulls, but perhaps not as much of one as had been hoped for.
The cooler CPI print is a win for sure. However, the Dot Plot’s new projection of just one rate cut this year rather than three is a loss.
Plus, it’s beginning to feel that the Fed is completely reactive rather than proactive. On this note, here’s legendary investor Louis Navellier from this afternoon’s Special Market Update podcast in Platinum Growth Club:
The Fed is not in charge. Do you know who is in charge?
The bond market. The bond vigilantes…
The Fed is just kicking the gain down the road. That’s what they’re doing.
We can see echoes of Louis’ disappointment in the numbers before and after the Fed’s data release and Powell’s commentary.
For example, the 10-year Treasury yield climbed from its session low (from 4.25% to 4.33%). The Nasdaq closed off its high (from “up 2.2%” to “up 1.5%”). And as we just noted, the odds of a September hike fell.
However, when we net it all out, today still goes to the bulls.
While the timing of the first rate-cut remains up for debate, nothing about today felt truly bearish for stocks. Rather, it was simply a question of “how bullishly do you want to interpret things?”
Now, we agree with Louis that the Fed’s “kick the gain down the road” approach could open the door to some trouble in the months ahead, but for now, the markets are happy.
So, how do we, as investors, respond?
By doing the same thing we’ve been doing…
We mind our stop-losses and position sizes, but then we stay in the market, riding it higher.
Bottom line: If the market wants to climb, let’s not overthink it.
For now, the trend is our friend.
Have a good evening,
Jeff Remsburg
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