US Interest Rates - When WIll the Fed Pivot
Interest-Rates / US Interest Rates Mar 01, 2024 - 04:36 AM GMTBy: Nadeem_Walayat
The current Fed Funds rate is 5.25% with he market expectations for the cuts to commence March 2023, though the market has been wrong for the whole of 2023 when Fed rate cuts were always seen as starting some 6 months into the future! In reality it does not matter when the Fed cuts rates because the Fed FOLLOWS the market rates not sets them. And the market rates as evidenced by bond yields has been falling for the past few months.
(Charts courtesy of stockcharts.com)
So whilst there has been no movement on the short end, the long end has seen a huge moderation in yields with the 10 year falling from 4.9% 3 months ago to 3.9% today which illustrates the point that the Fed FOLLOWS the market rather than leads the market as most financial instruments such as mortgages base their rates on the longer end of the yield curve and thus have effectively experienced a 1% cut in their interest rate.
So even though what the Fed does is a nothing burger, i.e. follows the market rather than leads, nevertheless the lemmings that are market traders and fund managers tend to react to the Fed to an extent that it can deliver short-term volatility especially if taking place at times of expected market Junctures such as the scenario that the current upswing should terminate during January which could be timed to take place with the 31st Jan Fed decision, though in respect of which there is an 83% probability for no change in the Fed funds rate.
However by March with CPI under 3% the Fed should start to reduce the Fed funds rate to track falling inflation given by then the gap will be over 1.5% that could see the rate drop by 0.75% by the time of the June 12th meeting.
What does this mean for the stock market.
It does imply economic weakness because as the Fed keeps reminding us it is not going to cut the fed funds rate anytime soon, so there is economic pain for the consumer on the short-tend, but rates on the longer will continue to improve depending on how tight the credit markets are, it's basically a balancing act between trying to keep a lid on inflation so depress the economy but not to the extent to trigger inflation as that would make the US debt to GDP state even worse.
The Fed is trying to engineer a weakly growing economy engineered to depress long-rates for the treasury to issue bonds at as low a coupon as possible below 4%.
A balancing act for the economy and the stock market which implies volatility with an upwards bias, i.e. the stock market should end 2024 higher then where it began, 2023 saw a 24% advance, it's not going to be 24% because this is balancing act that most are blind to i.e. everyone is waiting for the inversion to end and then rates to be cut, which as things look neither of which may happen much during most of 2024.
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Analysis that seeks to replicate the accuracy of 2023:
S&P Stock Market Analysis, Detailed Trend Forecast Jan to Dec 2024
CONTENTS
Investing in the Stock Market is Like Boxing With Mike Tyson
Keep Calm and Carry on Buying Quantum AI Tech Stocks
Synthetic Intelligence
The Roaring AI 2020's
Stock Market 2023 Trend Forecast Review
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE
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US Stock Market Addicted to Deficit Spending
INFLATION and the Stock Market Trend
US Unemployment is a Fake Statistic
S&P Real Earnings Yield
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When WIll the Fed Pivot
Stocks and Inverted Yield Curve
The Bond Trade and Interest Rates
US Dollar Trend 2024
US Recession Already Happened in 2022!
US Presidential Election Cycle and Recessions
Margin Debt
Stock Market Breadth
Stock Market Investor Sentiment
Bitcoin S&P Pattern
SP Long-term Trend Analysis
Dow Annual Percent Change
Stock Market Volatility (VIX)
S&P SEASONAL ANALYSIS
Correlating Seasonal Swings
Presidential Election Cycle Seasonal
Best Time of Year to Invest in Stocks
Formulating a Stock Market Trend Forecast
S&P Stock Market Trend Forecast Jan to Dec 2024
Quantum AI Tech Stocks Portfolio
Primary AI Stocks
AI - Secondary Stocks
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Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
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