Now they are just messing with us.
Two days ago, the Federal Reserve’s “dovish pivot” sent financial markets into a frenzy. The Fed’s summary of economic projections showed that the median forecast of Fed officials for the federal funds rate at the end of next year fell to 4.6 percent, 50 basis points below where it was in the September projections and 75 basis points lower than today’s rate.
This sent stocks soaring, pushing the Dow Jones Industrial Average to a new all-time high, and bond yields falling. Stocks of smaller public companies mounted to the sky, propelling the Russell 2000 up 6 percent in two days to a gain of more than 19 percent for this year.
The ten-year Treasury yield dropped by around thirty basis points and is now below four percent. The two-year fell by 60 basis points. The fed funds futures market went from pricing in four or five cuts next year to six or seven.
Apparently, the Fed was not all that pleased at these visions of sugar plums dancing in the heads of bond and equities traders. On Friday morning, New York Federal Reserve President John Williams went on CNBC’s Squawk Box to declare that rate cuts are not a topic of discussion at the moment for the central bank.
“We aren’t really talking about rate cuts right now,” Williams said.“We’re very focused on the question in front of us, which as Chair Powell said… is have we gotten monetary policy to [a] sufficiently restrictive stance in order to ensure the inflation comes back down to two percent? That’s the question in front of us.”
That statement stretches credibility beyond the breaking point. Back in September, just nine Fed officials thought the year-end 2024 fed funds rate would be below five percent. Now 16 officials do. Ten officials in September put in projections above five percent, including two who penciled in the rate as being even higher than it is now. Now just three see the rate staying above five percent, and none foresee a further increase.
Williams would apparently have us believe that Fed officials significantly moved their projections for their interest rate target while operating under some sort of monastic vow of silence.
But Powell Said They Were Discussing the Timing of Cuts
And then there’s the little matter of Fed Chief Jerome Powell‘s words at his press conference on Wednesday. (Emphasis added and we’re sorry for the word salad below, but that’s just the way Powell speaks these days.)
So the way we’re looking at it is really this. When we started out, right, we said the first question is how fast to move, and we moved very fast. The second question is, you know, really, how high to raise the policy rate, and that’s really the question that we’re still on here. We’re very focused on that. As I mentioned, people generally think that we’re at or near that and think it’s not likely that we will hike, although they don’t take that possibility off the table. So that’s — when you get to that question, and that’s your answer, there’s a natural — naturally it begins to be the next question, which is when it will become appropriate to begin dialing back the amount of policy restraint that’s in place. So that’s really the next question, and that’s what people are thinking about and talking about. And I would just say this, we are seeing, you know, strong growth that appears to be moderating, We’re seeing a labor market that is coming back into balance by so many measures, and we’re seeing inflation making real progress. These are the things we’ve been wanting to see. We can’t know — we still have a ways to go. No one is declaring victory. That would be premature, and we can’t be guaranteed of this progress. So, we’re moving carefully in making that assessment of whether we need to do more or not. And that’s really the question that we’re on, but of course, the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.
In other words, they were definitely talking about rate cuts.
Powell absolutely hates the emphasis the market places on the summary of economic projections. He frequently goes to great lengths to insist that these are the individual projections of participants in the Federal Open Market Committee meeting and not official projections. The projections are not even debated. But there was some discussion of the cuts.
Here’s Powell at the press conference again:
So it comes up in this way today. Everybody wrote down an SEP forecast. So many people mentioned what their rate forecast was, and there was no back and forth, no attempt to sort of reach agreement, like this is what I wrote down, this is what I think, that kind of thing. And a preliminary kind of discussion like that, not everybody did that, but many people did. And then, and I would say there’s a general expectation that this will be a topic for us looking ahead. That’s really what happened in today’s meeting. I can’t do the head count for you in real time, but that’s generally what happened today.
Jonathan Ferro, one of the three anchors of Bloomberg’s Surveillance program, which runs at the same time as CNBC’s Squawk Box, had some fun at the expense of Williams and Powell.
The market certainly did not take Williams seriously. It is still pricing in around a 75 percent chance of a Fed cut in March and around a 15 percent chance of a January cut. There’s nearly a one-in-three chance that the Fed cuts 175 basis points next year, which would be the equivalent of a quarter point cut at every meeting after January.
We will get the official minutes of the Fed meeting in a few weeks. It would be shocking if they support Williams’ claim that officials did not discuss rate cuts.