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Managing Director and Chief Market Strategist
Key Takeaways:
The Federal Reserve seems to be backing away from a market-priced, aggressive interest rate cut path. "Two weeks ago, a December cut looked highly likely. It is now a live debate that could go either way," write StoneX senior advisor Jon Hilsenrath and chief market strategist Kathryn Rooney Vera in their latest analysis.
Why the change? The economy isn’t slowing as quickly as was expected. Growth could reach 2.5% this year, far above what the Fed thought possible last year. "Recession didn't happen; neither did much of a slowdown," note the StoneX experts. Instead, "strong October retail sales data and continued low unemployment insurance claim data continue the run of vigorous data."
Fed Chair Jerome Powell's tone has shifted as well. “The economy is not sending any signals that we need to be in a hurry to lower rates,” he said in comments given on November 14. "The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully." Markets largely missed these comments amid election news, but they mark a key change in Fed thinking according to the StoneX team.
Politics add additional wrinkles. Though Powell says, “politics don’t affect Fed decisions,” Republican control of Washington could mean big fiscal policy shifts. "Tax cuts and deregulation without spending reductions could turbocharge an already robust economy and reignite inflation pressures," Hilsenrath and Rooney Vera warn.
The Fed aims to find a "neutral" rate – one that keeps the economy steady. But finding that sweet spot isn't easy. "As Powell often says, nobody knows the neutral rate. It changes over time, depending on economic conditions." After 2008, it stayed under 2% for years. Since 1954, it's averaged closer to 4.25%. Now "the Fed has been working on the hypothesis that the neutral rate is now close to 3%, but it isn't sure."
Markets see the change coming. The two-year Treasury rate has jumped from 3.5% to over 4.25% since September. Traders now expect a slower path to lower rates, with more stops along the way to check how the economy is doing.
For Powell, "the behavior of inflation is like the temperature gauge in a Thanksgiving turkey." With steady inflation and strong growth, the Fed feels no pressure to rush. According to the duo, the big question at present isn't how fast rates will fall. It's whether they will fall at all in December.
Read Kathryn and Jon’s full insights here.
For more in-depth analysis on global market trends and investment strategies, subscribe to "Macro Strategy by Kathryn Rooney Vera.” This comprehensive suite of reports offers expert insights on socio-economic and political trends influencing global markets, authored by StoneX's Chief Market Strategist.
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