The most electrifying three weeks in sports are almost upon us, when upsets, hype stories and Cinderella stories dominate America's lexicon. Around the time the NCAA tournament begins and millions of traders are consumed by basketball, the Federal Reserve also releases information on what should be a key March meeting.
Setting the scene
After the frenetic hike in November and December, markets entered 2024 pricing in 5 to 6 interest rate cuts in 2024 and a few more in 2025. However, this hike also caused financial conditions to ease modestly. dramatic. Strong gains in stocks, credit spreads and US Treasuries dampened the impact of all FOMC rate hikes. When teams entered the heart of conference play in January and February and had to increase their intensity, the economic data began to pick up again. Market expectations of the path of interest rates turned out to be overly optimistic and interest rates moved sharply higher, again causing losses in fixed income portfolios. It remains to be seen whether some of the stronger-than-expected data was an anomaly due to January's unpredictable seasonal adjustments or an actual increase in economic activity. The Fed will benefit from several more important data releases before it shuts down in a room for two days. After this important meeting, we will have the double headline of an updated Summary of Economic Forecasts and Jerome Powell's standard press conference.
Let the prediction begin
Fed governors updating their Summary of Economic Projections plots are like the NCAA selection committee sweating over the final iteration of the tournament bracket. They will evaluate large amounts of data, knowing that millions will sift through the discovery with a fine-toothed comb. Just as basketball fans will immediately start filling out their brackets and projecting their Final Four, bond investors will be revising their predictions about the timing and amount of rate cuts. But there is a fundamental difference. Joe Lunardi's Weekly Bracketology updates have conditioned fans on which teams should be in or out, and aside from a few teams on the bubble, expectations are well-defined and there are usually few surprises.
The lights are on – Let the madness begin
Jerome Powell and his colleagues have used recent speeches and newspaper articles written by Nick Timiraos to reduce rate cut excitement, and this has helped shift forecasts from 5-6 cuts this year to 3-4 cuts. But financial conditions are still accessible, animal spirits are alive and the bond market is open, as evidenced by extremely tight credit spreads and the massive issuance of investment-grade and high-yield bonds. We know the Fed is focused on risk management—balancing the risks of slowing the economy and fueling job losses against not cooling the economy enough and allowing inflation to reaccelerate or perhaps even take root. It feels like a time when the markets are vulnerable to a disturbance. Instead of projecting three rate cuts in 2024, the FOMC should shave it down to two rate cuts and signal fewer cuts in 2025 as well. This result would attract marketers' attention even in the midst of basketball's appeal.
Just as a blue-blood favorite narrowly avoiding an upset against a 16 could propel them into a deep tournament run, a well-orchestrated SEP update combined with a full-court press of Powell may cause volatility in the short term, but it will ultimately refocus markets and improve the chances for a longer period of economic expansion by avoiding the need for a harder cut. This may indeed be Chairman Powell's A bright moment.
Jeffrey Rosenkranz is a Portfolio Manager for the Shelton Tactical Credit Fund and the firm's separately managed fixed income accounts.