Markets Pare Back Pivot Expectations

As 2024 began, the bond market was priced for a series of 25-basis-point rate cuts beginning at the March 20 FOMC meeting. The market has repriced for a less dovish Fed amid continued upside surprises in recent economic and inflation data. The January CPI (consumer price index) report, released on Feb. 13, was the latest bucket of cold water on expectations for an aggressive Fed pivot, showing the highest monthly growth in core prices in eight months. The January PCE (personal consumption expenditures) report released later in the month painted no materially different picture for current inflation.

Make no mistake, inflation readings appear to be moving in the right direction but are not yet to a level that makes policymakers comfortable with sustainability.

The release on Feb. 21 of the Jan. 31 FOMC minutes — which suggested Fed leaders are in no rush to cut rates — was another factor that contributed to the repricing of market yields. The minutes acknowledged that upside inflation risks have diminished, but some expressed concern that progress toward the Fed’s inflation target could stall in the coming months. Perhaps more importantly, this meeting occurred prior to the release of the January jobs and CPI reports.

Politics And The Fed

The Federal Reserve was created as an independent government agency. As such, it should make monetary policy decisions with no political motivations. This does not mean policymakers are immune to the prevailing political environment, and monetary policy most certainly can impact elected officials and their respective campaigns.

This puts the Fed in a tricky position, particularly in an election year. Fed leaders typically avoid making policy decisions that could be seen as impacting an election in one way or another. This is a particularly important consideration for the elections in November 2024, a year in which the central bank is contemplating a pivot to rate cuts and less restrictive policy.

As November approaches, the Fed would ideally make no material changes to existing policy barring an unforeseen emergency — for example, the 2008 financial crisis. In other words, if it has already pivoted to rate cuts by August or September, it would continue doing so through the election. However, if by that same timeframe the Fed has not pivoted to rate cuts, it might choose to remain on hold through the remainder of the year.

Fed leaders will likely say the right things regarding doing what the economy dictates, but if they can avoid being seen as acting in a way that could be politicized, they will likely try hard to do so. That said, it might be an impossible task in the current environment.

Visit ALM First to read about the latest economic data and overall market trends in the March 2024 Market Commentary.

Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

This is not an offer for investment advisory services. This content is provided for general educational information and market commentary purposes only.