“It would be too early to conclude with certainty that we have reached a sufficiently restrictive state to predict when we will ease monetary policy,” Jerome Powell said during a discussion at Spelman College in Atlanta.
This was intended to appear hawkish and in no way contradict the recent expectations of a Fed rate cut that the market had been harboring for several weeks. As befits a genuine central banker, Powell did not state the matter clearly. “After moving quickly, the FOMC will move more cautiously as the risks of too loose and too restrictive policies become more balanced,” the Fed chairman added.
However, the market once again ostentatiously ignored Powell’s speeches and after these relatively “hawkish” statements… expectations for a rate cut in the US intensified. Futures estimates the chances of that at 65%. The first cut in the federal funds rate will take place during the Federal Open Market Committee meeting in March – According to FedWatch data. A week earlier, these chances were estimated at only 21%, and the first reduction was expected to take place in June.
The debt market reaction was also clear. The yield on two-year Treasuries fell by about 16 basis points, and the yield on 10-year Treasuries by more than 13 basis points. Therefore, we have seen a broad decline in market interest rates in the United States. In the case of two-year bonds, their yield is the lowest since June, and 10-year bonds are paying the lowest since September.
In short: The market sees data on lower inflation (CPI and PCE) and does not trust any assurances from Fed officials that they will maintain the “higher for longer” policy longer into the spring. In fact, a few days ago, an important Fed representative quite clearly suggested the possibility of lowering interest rates in the coming months. The current consensus is that inflation has been defeated, that the US economy will not slide into a severe recession, and that the Fed will begin slowly lowering interest rates in the spring of 2024.
US government bonds were the best response to such a scenario. The stock market reacted without conviction, with New York’s three major indexes ending the day with increases of between 0.5 and 0.8%. On the other hand, gold achieved a noticeable increase, as dollar prices rose by 1.5% to reach more than $2,070 per ounce. This is thus the third attack on the all-time nominal record ($2,077 per ounce) as of August 2020. Based on technical analysis, a possible break of this peak would herald another increase equivalent to the consolidation level from the previous three years – i.e. around 500 US dollars per ounce.
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