Jerome Powell
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Stocks and Bonds Slip as Powell Downplays March Rate Cut

By:Christopher Vecchio - CFA

The S&P 500 is up 1.42% for the month so far

  • The Federal Reserve held its main rate steady at 5.25% to 5.5%, as expected (100% chance, per CME’s FedWatch Tool).
  • The tightening bias may have been dropped from the policy statement, but FOMC officials cautioned against expectations of a March rate cut.
  • Stocks were trading near their lows of the day at the time this report was written.

Fig. 1: Intraday price percent change chart for /ES, /NQ, /ZN, /ZB, /GC
Fig. 1: Intraday price percent change chart for /ES, /NQ, /ZN, /ZB, /GC

The January Federal Open Market Committee (FOMC) meeting brought several consequential changes to the Fed's policy statement, although the changes may not have been dovish enough to appease stocks and bonds.

While policymakers left rates on hold at 5.25% to 5.5%, as expected, Fed Chair Jerome Powell’s press conference offered a clear assessment of the near-term path of interest rates.

The policy statement noted that “the committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” While Powell admitted the FOMC has confidence in how inflation has come down, it is not confident enough to suggest that a March rate cut is appropriate. More importantly, he noted that it may be unlikely that the FOMC would have achieved that confidence by the time of the March meeting.

The adjustment to rate cut odds was abrupt, with fed funds futures discounting a 35% chance of a 25-bps rate cut in March, down from 74% earlier in the day. The knock-on effect was imminent, with U.S. equities and bonds dropping in tandem. The S&P 500 (/ESH4) fell from a press conference high of 4929.25 to 4888 at the time this note was written.

/ZQ Fed funds futures forward curve (December 2023 to December 2025)

/ZQ Forward Curve

The question is now: What constitutes “greater confidence” about the path forward? Powell made it seem like another two labor-market and inflation reports may not be enough by March. Four iterations of each will be released by the May meeting, however, which may be enough.

The /ZQ (fed funds) term structure now shows an expectation that the Fed will begin cutting rates in May 2024. Five rate cuts in 2024 are still on the table according to current market pricing.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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