The market thinks it can't lose with the Fed's policy pivot on interest rates - CNBC

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If Federal Reserve Chair Jerome Powell is still a little reluctant to unfurl the "Mission Accomplished" banner, markets sure aren't. For much of this year, Wall Street has been betting on a win-win scenario: Either the Federal Open Market Committee achieves its soft landing on the economy and is able to lower rates, or misses its goal, creating a mild recession, and is forced to cut rates. Either way, investors win as the tightest monetary policy in four decades is loosened, financial conditions ease, and the door is open for a risk-on rally that appears likely to continue at least through the holiday season and perhaps into the new year. "The FOMC and Chair Powell leave 2023 on a high note, at least in the view of capital markets. Their battle with inflation is almost over and with little collateral damage to the U.S. economy," Nicholas Colas, co-founder of DataTrek Research, wrote in his daily market note following Wednesday's Fed meeting. "This paves the way for the year-end 'everything rally' to continue." "As for whether the market's optimistic take is warranted, that is 2024's business." Indeed, the market roared higher after the Fed for the third straight time opted not to raise rates . More importantly, policymakers acknowledged that cuts are likely ahead — three in 2024, four in 2025, then three more in 2026 until the fed funds rate slides toward 2%. .DJI YTD mountain Dow, YTD The Dow Jones Industrial Average on Wednesday eclipsed 37,000, a new high that not long ago seemed improbable considering the uncertain state of Fed policy, the economy and a plethora of geopolitical risks. Stocks added to gains Thursday, if at a bit more measured pace, as investors digested the latest developments. The policy pivot "It was hard to believe that just 8 weeks ago (almost to the day) the bond market was absolutely sure interest rates were set to follow the Fed's previous guidance of 'higher for longer,'" Colas wrote. "In his press conference, Chair Powell explicitly said he's not calling 'mission accomplished' just yet, but his comments left little doubt that he and the FOMC are very pleased with where things stand. What a difference a few weeks makes." Powell and his cohorts had been preaching from the "higher for longer" hymnal even in the days heading into this week's meeting. The only tempering came from some officials who had said they think the Fed can at least sit back now and watch as the 11 previous rate hikes totaling 5.25 percentage points weaved through the economy. Following the Fed's previous meeting, Powell on Nov. 1 insisted that FOMC members hadn't even discussed the notion of cutting. As recently as Dec. 1, he called talk of rate cuts "premature" and warned that more hikes could come if prices stayed elevated. At his post-meeting news conference Wednesday, he acknowledged a change on that front while still noting, "No one's declaring victory." Still, the market chose to focus on the more dovish actions of the committee. As of Thursday morning, traders were pricing in a funds rate in the 3.75%-4% range at the end of 2024, the equivalent of six quarter-point rate cuts, or one at every meeting but two. Paging Paul Volcker Post-meeting market commentary reflected a belief that the Fed is done raising rates and now will engage in the process of lowering the real funds rate to a less restrictive stance as the rate of inflation declines. "The market response to this evolution in the Fed's policy stance makes sense, with the prospect of more and potentially earlier rate cuts coming into play pulling both short- and long-term interest rates lower, which in turn should support higher equity valuations and prices," said Josh Jammer, investment strategy analyst at ClearBridge Investments. "Powell was understandably hesitant to declare victory with regard to avoiding a recession, but the lack of pushback on easing financial conditions as inflation continues its trend lower ... should be enough to continue to support the Santa Claus rally for the time being," Jammer added. To be sure, not everyone was popping champagne corks. The concern is that the Fed may have been too aggressive in its signaling and could be forced to double back if the inflation data don't continue to cooperate. In that case, market repercussions likely would be dire. "There was no inner Paul Volcker heard yesterday with Powell. There was no reminder of the lessons learned from the 1970's," wrote Peter Boockvar, chief investment officer at The Bleakley Group. Powell and other Fed officials have stressed repeatedly that they did not want to repeat the mistakes of the '70s, when the Arthur Burns-led central bank retreated too quickly from its inflation fight when the economy started to wobble. "There was no mention that they want to see a 'sustained' pace of lower inflation before they get comfortable. There was even a different guy than the one who spoke just two weeks ago who tried to push back on market easing expectations," Boockvar added. "It was seemingly 'Mission Accomplished' and now we just have to figure out when and why we start cutting rates was his message." Former Dallas Fed President Robert Kaplan noted that Powell said the Fed was still wary of a turn in the inflation data. "That's why people should not overreact to what he said," Kaplan said Thursday on CNBC. "He thinks they're done, it's likely the next move will be down not up, but he's keeping his options open."

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The market thinks it can't lose with the Fed's policy pivot on interest rates - CNBC
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The market thinks it can't lose with the Fed's policy pivot on interest rates - CNBC

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