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This week’s eagerly awaited Federal Reserve meeting poses crucial questions that extend beyond the obvious concerns of rate hikes and 2024 rate-cut expectations. While market expectations currently lean towards minimal rate adjustments, the Fed may introduce an unexpected twist that could significantly impact the S&P 500 and the 10-Year Treasury yield. This article explores potential curveballs that investors should keep an eye on.
Federal Reserve Rate-Cut Odds: Investors are closely monitoring the Fed’s stance, with markets currently pricing in negligible odds of a rate hike in the upcoming meeting. While there was initial anticipation for a March rate cut, the focus has shifted to the May 1 meeting as a more likely candidate for the first of the projected four rate cuts in 2024.Financial Conditions and Market Reaction: The recent easing in financial conditions, reflected in the Goldman Sachs financial conditions index, has seen a significant impact on the S&P 500 and Treasury yields. The S&P 500 reached a new 52-week high, and Treasury yields pulled back sharply. The article emphasizes the importance of investor expectations as a critical window to interpret the Fed’s meeting statement.
Will Fed End Tightening Bias? The Federal Reserve has been deliberating between maintaining the status quo and proceeding with one more rate hike. The unexpected drop in the jobless rate following Friday’s jobs report introduces the possibility of the Fed retaining its tightening bias. Alternatively, the Fed might shift to a neutral bias, acknowledging balanced economic risks and implying that a rate cut is as likely as a rate hike
.Inflation, Jobs Data, and Rate Cut Projections: Incoming data, particularly on inflation and jobs, suggests that the Fed may have made progress in achieving its objectives. The article notes Federal Reserve Chair Jerome Powell’s emphasis on monitoring inflation data for six consecutive months. With growth and inflation moderating, the Fed’s quarterly projections for 2024 rate cuts could align with the outlook presented in June, anticipating three quarter-point cuts.
The Federal Reserve’s Long-Term Neutral Rate: The unexpected curveball might come from the Fed’s long-term neutral rate of interest, which has remained at 2.5% since mid-2019. The article discusses the potential shift in this rate and its implications for the 10-Year Treasury yield. Raising the estimate of the neutral rate could influence financial conditions and act as a countermeasure against excessive easing.
Wall Street Eyes Higher Neutral Rate: As Wall Street economists express skepticism about the current 2.5% neutral estimate, the Fed’s acknowledgment of a higher neutral rate could signal a more cautious approach. The article suggests that a higher neutral rate wouldn’t alter the Fed’s immediate policy moves but could impact the floor for the 10-Year Treasury yield, influencing various sectors and corporate earnings growth.Investors should remain vigilant for unexpected announcements during the Federal Reserve meeting, particularly regarding the potential shift in the long-term neutral rate. As Wall Street eyes a higher neutral rate, the Fed’s actions could have far-reaching implications, influencing financial conditions, interest rates, and the broader economic landscape.
