Discussion
The fact rate cuts are even under discussion right now in the face of a very obviously reaccelerating US economy is silly, so the debate about whether the March SEP will show 2 or 3 cuts this year is moot from an equity market perspective. I am far more interested in Powell’s commentary around the “whether” hint. However - the debate about 2 or 3 cuts heated up last night on FinXwit, likely fueled by Zervos commentary, and with the debate leaning in one direction now there is an opportunity from a market perspective.
The Dots
A Xwitter user posted the note below from Zervos, which indicated the Fed is likely to keep 3 dots in place.
But Zervos is wrong, in my view. Powell’s dovish Congressional testimony pre-blackout was strongly predicated on the path of the economy following the December SEP, and with the US economy very obviously reaccelerating (discussed in part 1) and now realized inflation picking up, a shift down to two dots is a no-brainer. And critically, key “unofficial” FED communication vehicle Roger Ferguson confirms: 2 cuts cometh.
Nick the Contra
Back on January 28 I discussed the fact Nick Timiraos was used as a contra indicator ahead of an extremely dovish Powell on December 13. Waller’s November 28 commentary was a perfect preview of Powell’s 12/13 pivot, yet ahead of 12/13 Timiraos wrote about how the Fed was worried about easing financial conditions. Sure enough, on January 31 Timiraos wrote dovishly about how the Fed was worried as much about the economy as it was sticky inflation…just ahead of a decisively hawkish Powell press conference where he pushed back against March rate cut expectations and floated the anecdote that the economy was picking up “at the margin”, an anecdote confirmed multiple times over subsequent weeks by Bostic.
Last night I noticed Timiraos highlight a 5-day old piece of data about the labor market being weaker than it appears. He immediately responded with “I just saw it today,” but sure enough: This morning he penned a decisively dovish piece about how the Fed is worried about recession. Clearly, the 5-day old data highlight was a preview.
The combination of an obviously reaccelerating US economy, a decisive uptrend in the TIPS break-evens curve, sticky supercore inflation, now reaccelerating realized inflation data, and the broad weight of hawkish FED communication over the intra-meeting period make it odds on that the March SEP and Powell press conference will be hawkish relative to dove’ed up financial market participants. This morning’s dovish Timiraos piece was simply paving the way.
The WOTE FOMC Preview
2 cuts in 2024
Higher long-term neutral rate
Powell floats the possibility of no cuts in 2024 if the data don’t cooperate