Fed and Wall Street catch up to reality that rates should be lower

I've been calling for it for a while now, but now it seems to be finally happening. The US's monetary tightening phase seems to be done, and future loosening seems to be in the cards.

The Federal Reserve on Wednesday left interest rates unchanged and indicated three cuts to come in 2024.

Read the full story here: https://t.co/kVd36Kkl1B pic.twitter.com/yqlDS9dIk6

— CNBC (@CNBC) December 14, 2023

With the inflation rate easing and the economy holding in, policymakers on the Federal Open Market Committee voted unanimously to keep the benchmark overnight borrowing rate in a targeted range between 5.25%-5.5%.

Along with the decision to stay on hold, committee members penciled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than what the market had been pricing, but more aggressive than what officials had previously indicated….

The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025, or a full percentage point. Three more reductions in 2026 would take the fed funds rate down to between 2%-2.25%, close to the long-run outlook, though there was considerable dispersion in the estimates for the final two years.

Part of the runup in stocks in November and the first part of December was because Wall Street traders have started to anticipate rate cuts happening sooner than later in 2024. The written words in the Fed’s statement backed up those theories, causing stocks to jump after that document was released yesterday afternoon.

Then Fed Chair Jerome Powell appeared for his typical post-meeting press conference, and did a rate thing. He admitted reality and didn’t throw cold water on our positive economic situation.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news,” Chair Jerome Powell said during a news conference.

That echoed new language in the post-meeting statement. The committee added the qualifier that inflation has “eased over the past year” while maintaining its description of prices as “elevated.” Fed officials see core inflation falling to 3.2% in 2023 and 2.4% in 2024, then to 2.2% in 2025. Finally, it gets back to the 2% target in 2026.

And that led to even more buying, resulting in a new benchmark for the DOW Jones.

A stock market record: the Dow just closed above 37,000 for the first time in its history. pic.twitter.com/TbSaXTjo0N

— Steven Rattner (@SteveRattner) December 13, 2023

It’s nice to see the banksters and other Wall Streeters come around to what a lot of us have recognized for the last 6 months – that any kind of legitimate inflation in 2021 and 2022 really was a result of post-COVID supply and displaced labor situations. Well that, along with Wall Street speculation that spiked oil prices after Russia invaded Ukraine, and quite a bit of profiteering from corporations that were glad to take advantage of the higher prices.

The profiteering still is there (profits are back to their mid-2022 peaks), but because Producer Prices aren’t much different than they were a year before, and worker productivity keeps rising in 2023, the higher profits aren’t the result of much higher expenses for consumers.

Which means that the US has been put in a very good economic position as 2023 ends. Unemployment is still below 4%, 6-figure job growth is still happening every month, average US gas prices have dropped by a quarter a gallon in the last month (and even more in Wisconsin), and wages are outpacing inflation by more than 1% for line workers.

And now that the Wall Streeters are trying to front-run a lower-interest rate cocaine party, we have new highs in the stock market, and portfolios that got damaged in 2022 are now back on track. I have no illusions that everything will stay this positive, especially with bad actors more than willing to try to sidetrack Bidenomics over the next year to keep their tax cuts and other advantages they'd get under a Republican president. But it does look like we’re going to head back toward a more balanced interest rate situation, and as long as Americans continue to stay on the job, that should help a lot of people feel better about how the economy feels in this election year.

Well, they'll be positive about the economy if they're honest about the situations and not falling for what they want to believe. Some won't have the guts to do that, but if Federal Reserve oligarchs can finally deal with reality and figure out that 2023 is not a reurn of 1970s stagflation, I have hope for more than enough Americans to do the same.