After the December Federal Reserve Press Conference where Jerome Powell appeared to pivot to rate cuts ahead, with a more dovish tune than just a few days before, markets dialed up their expectations of up to six rate cuts though 2024, and stock markets veered towards all time highs, while bond yields fell. Powell said at the press conference that it was premature to declare victory, though he did acknowledge the question of when to begin “dialing back” policy restraint was discussed.
Futures markets have been anticipating the Fed will cut rates six times this year, beginning with a likely quarter-point reduction in March. Traders have priced in a 67% chance of a 25 basis point rate cut in March though several Fed officials have pushed back against expectations of an imminent policy move in recent weeks.
Which begs the question, are markets fooling themselves?
Well, we now have the minutes of the Dec. 12-13 Federal Open Market Committee meeting which were released yesterday. “Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” the minutes said.
Officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”
This helps to explain why markets are lower, and bond yields higher. So yes, markets are ahead of themselves.
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