Waiting for the Fed Pivot

Takeaways

• At its December meeting, the Fed held interest rates at 5.25%-5.50%.
• They still have ample wiggle room to keep rates higher for longer.
• The inexplicable result of overkill will be a recession in 2024.

There were very few people who thought the Fed was going to raise interest rates today, so it wasn’t surprising when they held the federal-funds target range at 5.25%-5.50%. What is surprising, however, is how the market seems convinced that rate cuts are right around the corner. That’s just wishful thinking.

Long and Variable Lags

The full weight of monetary policy is far from yet to be realized. As we’ve all heard, and hopefully more of us come to understand, monetary policy works in “long and variable lags.” While some effects are starting to show up in economic data – for example, rising delinquency rates on credit cards, auto loans, and commercial mortgages – the resiliency of the job market and ongoing, elevated wage growth suggests that the Fed still has a lot of wiggle room to keep rates higher for longer.

Jerome Powell's Comments

The man himself, Chairman Powell, has remained pretty definitive on this matter, indicating that it’s much too early to conclude that inflation is under control and even more premature to speculate on rate cuts. He reiterated that stance in today’s press conference.

The Good News and the Bad News

On a positive note, we’re at the peak. Rates aren’t going any higher, so if you can continue to hold on, you’ll probably be alright. On a less positive note, it’s inevitable that things are going to get worse before they start to get better.

Err on the Side of Overkill

If there’s one thing you can say about overkill, the objective is at least accomplished. Whereas, if you bungle the job, you’ll have to go back and do it all over again. Even worse, the second time around, everyone is going to be second guessing your every move. The Fed, in keeping with the human nature of the Board of Governors, is not going to subject themselves to that situation. Instead, they’re going to err on the side of overkill, with the inexplicable result being a recession, most likely in the second half of 2024. That’s what it’s going to take to finally precipitate the long-awaited Fed pivot and rate cuts of any real significance.