The most exciting three weeks in sports are approaching, when upsets, buzzer-beaters and Cinderella stories will dominate America’s lexicon. As the NCAA tournament begins and millions of traders are obsessed with basketball, the Fed has also hinted at a key meeting in March.
Set the stage
After a violent rebound in November and December, the market enters 2024, with 5 to 6 rate cuts expected in 2024 and several more rate cuts in 2025. However, the rally also led to a sharp easing of financial conditions. Strong rebounds in stocks, credit spreads and U.S. Treasuries dampened the impact of any rate hikes by the Federal Open Market Committee. When teams get into the heart of league play in January and February and need to ramp up the intensity, the economic numbers start to accelerate again. It turned out that the market’s expectations for the direction of interest rates were too optimistic, and interest rates moved sharply higher, causing fixed income portfolios to again suffer losses. It remains to be seen whether some of the stronger-than-expected data is an anomaly due to unpredictable January seasonal adjustments or an actual pickup in economic activity. Before the Fed locks itself in a room for two days, they will benefit from several more important data releases. Following this key meeting, we will have a double session with an updated summary of economic forecasts and the standard Jerome Powell press conference.
Let the predictions begin
Fed governors update point chart summary of economic forecasts just as the NCAA selection committee agonizes over the final iteration of the tournament. They will evaluate large amounts of data, knowing that millions of people will carefully analyze the information revealed. Just as basketball fans will immediately start filling out their brackets and predicting their Final Four, bond investors will be revising their predictions on the timing and amount of interest rate cuts. But there is a key difference.Joe Lunardi’s Weekly bracketology The update leaves it to fans to decide which teams should be in and out, and except for a handful of teams in the bubble, expectations are clear and there are generally few surprises.
The lights come on – let the madness begin
Jerome Powell and colleagues used recent speeches and newspaper articles Nick Timiros Curbing interest rate cut sentiment, this has helped to adjust expectations for rate cuts this year from 5-6 to 3-4. But financial conditions remain strong, animal spirits are still active, bond markets are fully open, as evidenced by extremely tight credit spreads and massive issuance of investment grade and high-yield bonds. We know that the Fed’s focus is on risk management – balancing the dangers of slowing the economy too much, triggering job losses, against the risks of not cooling the economy enough, causing inflation to reaccelerate and possibly become entrenched. It feels like a time when markets are prone to volatility. Instead of projecting three rate cuts in 2024, the FOMC should reduce it to two and signal even fewer cuts in 2025. Even under the influence of basketball, this result will attract the attention of traders.
Just as a blue-blood favorite’s narrow avoidance of an upset win over a No. 16 seed can propel them further into the tournament, a carefully orchestrated SEP update combined with Powell’s full-court press could create volatility in the short term, But it would ultimately refocus markets and improve the chances of long-term economic expansion while avoiding a hard landing.This may indeed be Chairman Powell’s a shining moment.
Jeffrey Rosenkranz is a portfolio manager for the Shelton Tactical Credit Fund and the firm’s Fixed Income Separately Managed Account.
