It is never easy to gauge the direction of Fed policy or the economic outlook, and 2023 has been a year that has been particularly difficult to have conviction. Until now. A shift in Fed policy is going to make things easier, and Jerome Powell’s comments set aside any doubts that the Fed has a dovish bent heading into 2024.
Powell underscored that the Fed would not hesitate to raise rates to counter additional inflationary pressures. Yet the market had shrugged off previous such statements and, this time focused on a slew of dovish comments, including: “Recent indicators suggest that growth of economic activity has slowed substantially from the outsized pace seen in the third quarter.” He added: “…..activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates.” Additional commentary regarding the progress made in bringing down inflation (albeit still above the 2% target) then followed.
The FOMC Statement and Powell’s transcript from the press conference are available here:
It is worth recalling the market’s reaction to Powell’s most recent comments on 12/1. Powell suggested that calls for the end of rate hikes were premature, a statement that one might expect to cause rates to sell off and equities to come under pressure. Neither happened, as Treasuries rallied on the news and equities remained firm. Now that the Fed acknowledges that the economy is cooling and rate cuts are in the future, the market has gone from forward leaning to running full speed ahead.
The continued rally in Treasuries, equities and corporate spreads is sure to bring a full slate of corporate bond issuance starting the first week of January. Investment Grade Slows into Year-End
We look forward to sharing additional insights on the underlying trends that may impact when, not if, the Fed will commence a rate cutting initiative.
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