Thanksgiving is this Thursday, which means that it is one of the busiest travel periods in the US. Scores of news reporters are dispatched to airports and highway rest areas[i] to get quotes from weary and frustrated travelers, many of whom are struggling to attend dinner with relatives that they may not actually like. It means that millions of children, stuck in back seats in traffic on trips long and short with aggravated parents, will offer the dreaded, anguished cry, “are we there yet?”
It occurred to me last week that Fed governors must feel like annoyed parents right now (I raised that idea in a media appearance on Friday). Investors are ever hopeful for a pivot, a pause, or some other sign that the Federal Reserve will relent in their fight against inflation. In effect, they are like anxious children wondering – against all obvious evidence – whether the Fed has reached their destination. And like the frustrated parent behind the wheel, the commentary from a range of various Fed talking heads seems to reflect that frustration.
The first and most obvious grumpy response came from Chair Powell in August at Jackson Hole. After his comments at the press conference after the July FOMC meeting were widely (mis-)interpreted to imply that the Fed might make a policy pivot away from restrictive policies sooner than expected, Powell gave a terse rebuttal of that notion. Markets were not pleased with that verbal spanking, yet it didn’t take investors long to wonder once again when the Fed might change their minds.
We won’t elaborate all the various times since August when various Fed bigwigs shot down the latest speculation that their inflation targets have been met. The destination is a sustained inflation target of 2%. Just as it should be obvious to children when the car is moving, not stopped at grandma’s house, it should be equally obvious to investors that the Fed has not arrived at its ultimate destination. Chair Powell has mad that abundantly clear at the FOMC press conferences since July, while St. Louis Fed President Bullard was merely the latest with a grumpy assessment about future rate targets last week.
No matter how often we’re told otherwise, investors remain hopeful for a pivot and/or pause. Fed Funds futures show a peak at about 5.06% in June, and then a likelihood for a 25-basis point cut by November. It is one thing for equity investors to be optimistic – face it, you wouldn’t or shouldn’t be investing in stocks if you’re not optimistic about something – but another for Fed Funds traders to offer a similar dose of optimism. They are simply concerned with the path of rate policy, and should be more clear-eyed about its prospects.
Maybe the Fed Funds market will prove correct. That said, a year ago today they were predicting a 0.63% target for the past FOMC meeting, so they’re hardly infallible. In the meantime, I prefer to take the Fed at their words. Perhaps we should at least wait until we see the highway exit for grandma’s house before we start asking the dreaded “are we there yet” once more.
[i] Europeans will note the absence of train stations from that list. We’re talking about Americans, most of whom simply don’t do trains.
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