Yassin Sona 1
Kevin Flanagan
As expected, the Fed once again did what was widely expected and kept the federal funds target unchanged at the March FOMC meeting. Therefore, the trading range remains at 5.25%-5.50%, still at a high level in more than 20 years.
For those paying attention, this represents the fifth consecutive FOMC meeting where policymakers decided to take no action on interest rates.
While Powell and his colleagues seem to agree that a rate cut is likely to happen sometime later this year, the next question to consider is when this potential easing will happen and, more importantly, when the rate cut will happen What’s up? What the interest rate cut event will look like in the end.
As I mentioned in a previous blog post, there is a disconnect between money market and bond market expectations Rate cuts and what the Fed is thinking in this regard.
Going into this year, markets viewed the March meeting as a timetable for the first of a series of about six rate cuts starting in 2024.
Well, now that’s a moot point, isn’t it? The “good” news is that the U.S. Treasury Department (UST) and others are now closer to the expectation that the Fed will cut interest rates only three times this year, at least as of this writing, with June becoming the “new March” for the initial cut .
Of course, so far, labor market and inflation data have not given the Fed the urgency to consider easing monetary policy before June.
In fact, if the data continues to come out like this, the recent employment and CPI/PPI reports may cast doubt on the June “up”. So voting members clearly feel they can now sit back and wait patiently.
Looking ahead, though, did Chairman Powell at least provide any clues as to his views on the timing of a rate cut in his recent semiannual monetary policy testimony to Congress?
Interestingly, Powell said the Fed was “not far off” from being confident it would begin cutting interest rates, and that inflation did not have to fall all the way to the Fed’s 2% target.
But what does this mean? I think the continued progress of inflation will determine whether a rate cut in June is still the starting point.
While the UST market is highly focused on CPI data, the Fed’s 2% target is based on its preferred core PCE indicator, which currently stands at +2.8%.
Taking Powell at his word, one has to wonder whether +2.5% is the Fed’s “real” inflation target.
This is where things get tricky, as that could mean core CPI could still be at a fairly high +3% to +3.5% level. If core CPI is so high, will the Fed really cut interest rates?
Also, let’s not forget quantitative tightening (QT). The Fed’s balance sheet plan is now in view.
The imminent end of QT does not appear to be on the agenda yet, but reducing the pace of balance sheet shrinkage also appears to be part of the monetary policy landscape later in 2024.
bottom line
What should investors pay attention to in the future of monetary policy? If history is any guide, the Fed will start cutting interest rates without any guidance on this.
Therefore, if the Fed intends to begin easing interest rates in June, the onus is on the May FOMC meeting to begin the process.
Kevin Flanagan, Head of Fixed Income Strategy
As a member of WisdomTree’s investment strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content, and travels with the sales team to conduct client-facing meetings and provide expertise on WisdomTree’s existing and future bond ETFs. Additionally, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he served as Managing Director of Wealth Management and Chief Fixed Income Strategist. He is responsible for providing tactical and strategic advice and creating asset allocation models for fixed income securities. He is a contributor to Morgan Stanley Wealth Management’s Global Investment Council, a lead author on Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and works with the firm’s Research and Advisory Group division to build ETF and fund managers Asset allocation model. Kevin holds an MBA from Pace University’s Rubin School of Business and a BA in Finance from Fairfield University.
Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
