BlackRock: May brings flowers, not March….

BlackRock: May brings flowers, not March….

1 februari 2024

Fed
Outlook vooruitzicht (11) silver lining herstel

The oft-told rhyme of 'April showers bringing May flowers' mentions the Spring awakening of a better environmental condition for all.

Like the Fed, and Chairman Powell, March is not a month mentioned as the beginning of this condition. Yet, as with the enthusiasm of Spring once again making an appearance during the coming months, so too is there optimism alongside a cutting of interest rates accompanied by the very clear progress on inflation. The Fed, and Chair Powell, were very clear on that today, in that cutting interest rates and making progress toward a still undefined long-term Fed Funds rate is on its way.

Hence, as was widely understood, the Federal Reserve’s FOMC today held the Fed Funds target policy rate range unchanged at 5.25-5.50%, and also as widely expected, there was no change in balance sheet policy either. Still, the policy statement did witness critical language changes that dropped the tightening bias and adopted a more neutral, or balanced, stance toward policy.

This change was not surprising, as the progress toward reducing previously elevated levels of inflation has been considerable, and the economy has also held up remarkably well in the face of the historic rapidity of this tightening.

In light of both normalizing inflation, as well as resilient economic growth (also displayed in recent GDP data for Q4 2023), we think the market calls for a March meeting policy rate cut have been overdone. Not least because we do not see a lot of current downside risk for the Fed to maintain patience at current policy levels, in its effort to be certain that excessive inflation has been fully contained.

As such, I have suggested that the Fed will likely wait until the May meeting to cut policy rates, and then could well cut in modest quarter-point increments at every-other meeting. This would ease some of the pressures being felt by the more interest-sensitive segments of the economy, while still allowing for plenty of time to make sure inflation is not likely to reaccelerate and that the economy remains in sound shape.

Fixed income investors, and indeed all investors, should take comfort from today’s policy meeting, which displayed a Fed that recognizes progress on what has heretofore been sticky-high inflation levels.

Spring will in fact be upon us climatically, as well as in the Fed moving interest rates from the very restrictive territory over the coming next few months. Yet, pinpointing the specific month of initiating this policy evolution for most investors is less important than the direction of travel and where the path will lead to. And for those who want to invest alongside of today’s still elevated interest rates, the opportunity is still here, but should be melting gradually away over the coming months.

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