All the positive economic talk from this week’s Federal Reserve meeting is hurting investors, who are now discounting hopes of even one rate cut this year.
Fed Chairman Jerome Powell expressed optimism at a post-meeting press conference, despite net job growth being “zero” and inflation above the central bank’s 2% target. Powell said economic growth was “robust” and rejected the idea that stagflation was here to stay.
The Federal Open Market Committee’s statement cited “uncertainties” surrounding the Iran war, but Powell did not address this directly. Investors were taking a dim view of the prospects for monetary easing as fighting in the Middle East escalated and the Fed showed no signs of responding.
Instead of rising, stock prices fell on the central bank’s apparent optimism. Stock index futures were also negative on Thursday morning.
The move is consistent with further correction in the federal funds futures market, with only a 17.2% chance that the Fed’s benchmark rate would be cut by just a quarter of a point as of around 8:50 a.m. ET Thursday, according to CME Group FedWatch analysis.
The probability of a rate hike further rose to 8.4%.
“Taper tantrum”
Market veteran Ed Yardeni calls this reaction the “taper tantrum,” alluding to an earlier period when investors rebelled against expectations of tighter Fed policy.
“The combination of the war and the Fed news triggered a tapering tantrum in the stock market as investors concluded that there were limits to monetary policy’s ability to address the economic impact of the war,” Yardeni said in a note posted late Wednesday.
“Indeed, Fed Chairman Jerome Powell barely mentioned the war,” he added. “In particular, he said the economy and labor market are in good shape and that core inflation is likely to moderate in the coming months, suggesting the Fed will remain on pause for some time.”
Before the war, traders expected a rate cut in June, another in September, and possibly another before the end of the year, depending on the state of the labor market and inflation.
The question was which side of the Fed’s so-called dual mandate would receive more attention. An anemic labor market and inflation, although well off previous highs, remain above the central bank’s 2% target.
This week’s meeting saw gradual changes in the “dot plot” grid of officials’ personal interest rate forecasts. That led investors to scrutinize Powell’s comments for further clues about the Federal Open Market Committee’s direction.
absorb shock
“Chairman Powell has repeatedly supported the Fed’s patience argument over the past two years: the economy has been absorbing shocks better than expected,” Fundstrat analysts said in a note. “Nonetheless, markets reacted as if Mr. Powell had significantly tightened the policy outlook.”
The chairman mentioned forecast uncertainty more than a dozen times, conditioning much of the future development of the oil crisis and the impact of tariffs on inflation.
“The next trigger will be whether future inflation data starts to show some easing in tariff-sensitive products before higher energy costs become more widespread,” the Fundstrat team said. “Until then, Chairman Powell’s framework remains in place: cautious and conditional, and we remain reluctant to act on outlook alone.”
The Fed’s next meeting will be held on April 28-29. Traders are pricing in zero chance of a rate cut and a 10.3% chance of a quarter-point hike.
