The Fed has a problem because it says one thing, and the markets want to hear the other. “The bottom line is that markets are not buying what the Fed is selling,” said Diane Swonk, chief economist at KPMG. “That raises the ante for the Fed to go forward and be more hawkish.” Stocks were lower Thursday, and bond yields retreated as investors considered the hawkish tone of the Fed’s message that it will keep rates high for longer. The markets turned around on Wednesday afternoon, after the Federal Reserve issued a policy statement with a new interest rate and economic forecast. The Fed raised the benchmark interest rate by half a percentage point, and is now targeting a range between 4.25% and 4.5%, a 15-year high. The Fed also indicated that it will raise the interest rate to a level of 5% to 5.25% next year. “[Fed Chair Jerome] Powell never found what he was after. “There’s clearly a gap between what the financial markets want to believe and what he wants to say,” Swonk said. “The rhetoric was hawkish and the Q and A were dovish.” He said the Fed appears determined to raise rates until they stop raising rates. Swonk he noted that there is an agreement among Fed officials to drive higher rates, and many officials predict the end of rates above 5% in 2023. But, the markets just do not believe. to tighten again. If they do, they should do more, “said Swonk. Fed money futures on Thursday indicated a higher rate of 4.89% next May, below the Fed’s target. , a chart showing the anonymous targets of various Fed officials. “The dot plot is leading the people to the top, and it’s like the market didn’t take the bait,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. He marked 2. – annual yields, which mostly track Fed policy, moved lower after the Fed meeting. It was 4.22% on Thursday. “The market is saying 4.75% to 5% is where the Fed ends,” Boockvar said. “That’s just one 50 basis points. In today’s action, Powell succeeded in convincing people that rates will stay high for a long time,” Boockvar said. “Keeping rates high for a long time is a form of consolidation. Every month that goes by there is personal debt maturing that will have to be repaid at a faster rate.” ‘Between hope and fear’ The pace of inflation appears to be one area where markets and the Fed disagree. Strategists were surprised that the Fed did not mention that there was improved inflation data. until Powell spoke, while the markets have held on to every positive move lower. In his post-meeting meeting, Powell acknowledged the cooling of inflationary pressure, but added that the Fed wants to see more evidence that inflation is ending. The consumer price index in November was 7.1% on an annual basis , down from 7.7% in October and better than the economy expected. Some experts say the Fed’s determination to keep interest rates up is also raising concerns that it could cause more damage to the economy. of bonds, strategists say recession worries are clearly holding back interest rates. “I think investors continue to be stuck somewhere between optimism and fear,” said Michael Arone, chief investment strategist at State Street Global Advisors. “They continue to hope that the Fed will change, and I think they continue to fear that they will raise rates too far and eventually break something or put the economy in a recession.” DoubleLine Capital CEO Jeffrey Gundlach said after the Fed meeting on Wednesday that the central bank should stop raising rates because the economy is already weak. “I think there is some progress on inflation,” Gundlach said on CNBC’s “Clothing Bell: Overtime.” “No one is talking about all these runaway inflation anymore. As the economy weakens, I think the inflation rate will come down faster than most economies do.” Stocks were higher ahead of the Fed’s 2 pm ET statement on Wednesday, and sold off before returning to their worst levels of the day. The 10-year Treasury yield was the highest of the day just after the Fed’s statement and declined to go on Powell’s brief until the end of the day. Yields move in opposite directions. The 10-year was at 3.48% on Thursday. Another problem for the Fed is that the terminal rate forecast, at 5.1% in 2023, is followed by the forecast of the rate in 2024 which is a full percentage point lower. Boockvar said that the futures market is worth less than 4% in April, 2024, and its value has been completely reduced by the end of 2023. Fed forecast on Wednesday. “The market thinks that you can say high for a long time all you want. We do not believe. We believe that the second you stop walking, in six to nine months you will start to cut,” he said before the meeting. . “As long as the Fed keeps those cuts in their forecast … the long-term highs are not reliable in the market mind.” Economists at Citigroup also noted how the Fed failed to drive a tighter tone on policy on Wednesday. They wrote in their article at the Fed meeting, “The Hawkish message is failing the world and the markets.” In it, they wrote that “Powell and the FOMC forecasts were about as hawkish as reasonably expected.” Andy Brenner of the National Alliance wondered if the Fed was done with its hike. “While we would like to say yes, the Fed’s report was too difficult to make that decision at this time.” He added that the dollar, which fell again on Wednesday, pretended that the Fed was over. “We’ve seen this before,” Brenner wrote. “Powell is trying to make everyone believe he’s a hawk…but once he’s off script the world can see he’s a dove in wolves clothing.”
