That was quite the pivot from the Federal Reserve last night. Rates have tumbled and stocks have hit all-time highs. Chair Jerome Powell declared victory over inflation and the market is celebrating the triumph. The question is whether it’s come too soon. You cannot deny inflation is coming down, but it looks as though the ‘last mile’ just got that bit harder. Is it any coincidence that ’24 is an election year? Or is it the tacit acceptance that they won’t hit 2 per cent and inflation is just going to be higher now. Or have they actually done the impossible and won?
The Fed lit the touch paper for a monster rally as it greenlit market expectations for rate cuts next year. This was not in the script entirely – we thought the Fed wouldn’t seek to push back against the market entirely, so this was a major pivot. The Fed didn’t just say it’s done, it embraced the much more dovish view of the market.
Powell said: “Declaring victory would be premature…but of course the question is 'when will it become appropriate to begin dialling back?" The market didn’t hear the first bit and focused only on the second.
The pivot has been swift: On 1 December Powell said it would be “premature to … speculate on when policy might ease.” Yesterday he said rate cuts were “coming into view’ and “clearly a topic of discussion”. Why so sudden? Six-month annualised core inflation below the 2 per cent target could be a start – and it seems the Fed is more mindful of being too tight for too long, and prefers to act early. Maybe learning the lesson of being way too loose on the way into this.
The ‘dot plot’ showed no more rate hikes and 0.75 percentage points of cuts for next year, which was a touch more than the 0.5 point cuts I’d thought they would stick with. There was little change to GDP and inflation forecasts.
The Fed is frontloading rate cuts into the election year – now seeing three in 2024 and four cuts in 2025 compared with two and five in previous estimates. This is more than enough for the market to read the pivot from ‘higher For longer’ to ‘cut, cut, cut’ loud and clear.
Yields tumbled to their lowest in some months, the US 10-year below 4 per cent and the two-year to 4.3 per cent. The 10-year Tips inflation protection protected yield tumbled to around 1.75 per cent. That’s pushed the dollar to a fresh four-month low.
Stocks surged: the Dow Jones Industrial Average jumped to a record high and closed above 37,000 for the first time. The S&P 500 rallied 1.4 per cent to cross 4,700 for the first time since Jan 2022. This morning, the FTSE 100 is up 2 per cent with the Dax and Cac up 0.7 and 1 per cent respectively. Both hit fresh record highs ahead of the European Central Bank meeting later.
Bank of England announces at 12pm amid flat GDP growth, declining wage growth and inflation finally coming down – it is all but certain to keep interest rates on hold today. But it will be vigilant. The Bank will reiterate that it could tighten monetary policy further and lean against the market’s pricing in rate cuts next year as much as it is. UK interest rate swaps indicate the BoE will be cutting rates by 1 percentage point next year, though Governor Andrew Bailey has been cautious about endorsing this view. I think the BoE ought to be pushing a higher for longer message more than the Fed or ECB need to do – inflation remains much more of a problem for the UK.
The Trader is written by Neil Wilson, chief market analyst at Finalto
