Here’s what I expect on Wednesday. The Federal Reserve’s Open Market Committee will announce a 25 basis-point interest rate increase. In his post-meeting press conference Fed chair Jerome Powell will try to talk the financial markets out of their exuberance by stressing that the Fed doesn’t see a quick end to interest rate increases because at 5% inflation is still running way ahead of the Fed’s 2% target rate.
And I expect that investors and traders will ignore Powell’s comments and bid stocks higher because investors and traders now believe that a pause in rate increases is just around the corner–maybe as early as March–and financial markets can look for the Fed to begin cutting interest rates in the second half of the year.
To which I say, Bushwa! I would sell any post-meeting rally. March increasingly looks like the month where reality will whack the markets on its head.
Today, January 30, the CME FedWatch tool says that investors and traders are giving 98.1% odds to a 25 basis-point increase on Wednesday. That would take the Fed’s benchmark short-term interest rate to a range of 4.5% to 4.75%. I’d say that call is probably right –if only because if the Fed was going to disappoint the financial markets and create a big dip in prices, I think the central bank would have been pushing back harder in recent weeks
But I part from the market when it comes to what happens next.
The consensus, which is priced into the market at the moment, is that this slowing of interest rate increases signals that the peak interest rate for this cycle will be at 4.9% or so in May and June. And then interest rates will fall to 4.5% by the December Fed meeting. With further interest rate cuts in 2224.
Back in December with the last release of its Dot Plot projections the consensus at the Fed was that the interest-rate peak would need to be above 5% this year. That view got 17 of 19 “votes” in the projections. The other two forecasts from Fed officials said rates would have to rise to 5.5%.
I think that Powell’s attempts to talk the market out of any euphoria after the Wednesday news will focus on the need to keep rates higher for longer. And that would be disappointing to investors and traders.
However, belief in macro changes always comes slowly to the financial markets–which is why I believe there’s a good chance for a rally after the Wednesday announcement even with any hawkish comments from Powell.
But the March 22 meeting of the Federal Reserve includes an update on Dot Plot forecasts from the Fed on GDP growth, unemployment, inflation, and interest rates. I think those projections will back up that higher for longer rhetoric. And the financial markets will be hard-pressed to ignore numbers that show the Fed pushing interest rates above 5% and holding off on any interest rate cuts until late in 2024 if then.)
Which is why, if we get a rally on Wednesday, I won’t be a buyer but a seller.
Especially if we get negative revenue and earnings guidance from Apple, Alphabet, Meta Platforms, and Amazon this week and next.
I’m still looking for a retest of the 2022 bear market lows. Sometime in June or so, depending on when the debt ceiling crisis starts to strike the markets as serious. All things considered, stocks are expensive right now.
