By It’s hard to believe, but there’s a part of me that actually misses Alan Greenspan.
The former Chairman of the Federal Reserve was a master of obfuscation. He once famously said, “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”
Now, the Eccles Building in Washington and its 12 outposts in various Fed district banks have become a modern-day monetary Tower of Babel. The Fed governors and presidents speak out frequently, though not always in unison, leading to even more confusion than when Greenspan’s convoluted language enveloped the central bank.
In a recent example, Jerome Powell, the current Fed chairman, caused a frenzy in the markets last Wednesday. He mentioned that future interest-rate cuts were under discussion during the Federal Open Market Committee’s policy meeting. This seemed to contradict what he had said just 12 days prior ─ that it was too early to speculate about such easing of Fed policy. However, the newly released FOMC Summary of Economic Projections suggests that committee members foresee reductions in the coming year.
According to the projections, the median federal-funds rate is expected to reach 4.6% by December 2024, down from the previous estimate of 5.1% set at the September FOMC meeting. This implies three quarter-point reductions in the next year, bringing the current target range of 5.25% to 5.50% lower.
But the markets, which had already factored in these anticipated moves and more, reacted even more strongly following Powell’s press conference. This led to furious rallies in both bond and stock markets. The 10-year Treasury note, which was trading just above 5% in mid-October, plummeted below 4%, while stocks surged, resulting in the Dow Jones Industrial Average setting a new record.
It’s clear that the guidance provided by the Federal Reserve is becoming increasingly convoluted, causing volatility and uncertainty in the markets. The absence of clear and consistent messaging leaves investors struggling to interpret and react to the central bank’s intentions. As we navigate through this monetary maze, it becomes apparent that we could use a bit more of Greenspan’s unique talent for obfuscation.
The Fed’s Shifting Stance Raises Questions
The recent actions of the markets have evoked memories of Alan Greenspan’s famous phrase: “irrational exuberance.” However, New York Fed President John Williams appeared on CNBC to clarify that rate cuts are not currently being discussed by the panel. It is worth noting that Williams is not only the president of the New York Fed but also the vice chair of the FOMC, with a permanent vote on the panel, distinguishing him from the other 11 reserve banks that have an annual rotation.
Nevertheless, some market experts have speculated that the Fed’s change in direction might be more politically motivated than driven by economic factors. While one of the central bank’s dual mandates is already on track – with a jobless rate of 3.7% in November, indicating full employment – inflation remains significantly above the Fed’s 2% target. Consumer prices, excluding food and energy, rose by 4.0% over the past 12 months.
Bank of America strategists led by Michael Hartnett pointed out in a research note that it is rare for the Fed to cut rates when core CPI surpasses the unemployment rate. If the fed-funds futures’ pricing, which suggests a 1.5 percentage point cut in 2024, materializes, it would resemble a pivot similar to the one observed in 1975. They drew attention to the current jobless rate below 4% and the increasing value of gold, both of which indicate persistent inflationary pressures.
Skeptics in the market suspect that the Fed’s anticipated shift towards easing is influenced by the fact that 2024 is an election year. Additionally, lower short-term interest rates could assist in managing the Treasury’s substantial financing needs, particularly its reliance on short-term T-bills.
Ultimately, as always, the actions of the Fed will be the most telling statement of intent.
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