Market Note (Special Edition) – February 2, 2024

By Hightower Great Lakes on February 2, 2024

The Statement and Press Conference Highlights

The Fed voted unanimously to leave the current fed funds rate unchanged at 5.25-5.5%. This is now the fourth consecutive meeting where the policy interest rate remained at this level. Although there was not a direct change in interest rates, some of the commentary within the statement has been altered and adjusted.

Due to GDP coming in higher than expected, the committee said that “economic activity has been expanding at a solid pace.” This was opposite the viewpoint expressed during the December 2023 meeting. Previously, the Fed’s statement had also been leaning towards additional policy firming, but instead now says that it is considering “any adjustment” to the target range.

The committee did tamp down expectations of a March cut saying that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

As of now, the Fed has not signaled any change in the quantitative tightening plan. This plan currently allows a maximum of $60 billion in Treasuries and $35 billion in mortgage-backed securities to come off the Fed’s balance sheet monthly.

Chart 1: United States Personal Consumption Expenditure[1]

Key Takeaways

The rate cycle has reached its peak, but the Fed must find the balance of exactly when to start cutting. Cutting too soon may result in inflation coming back stronger, whereas waiting too long may cause prolonged suffering and economic damage.

The good news is that a cut is guaranteed. Jerome Powell even said, “Everyone on the committee wants to lower the policy interest rate.” Inflation has come down meaningfully but there was no further evidence that it is anchored. This means the Fed is not yet convinced that inflation won’t shoot back up after the committee starts implementing rate cuts. 

That said, inflation is down meaningfully; CPI has gone from 9.1% at its peak in June 2022 to 3.4% today. Core PCE is 1.5% annualized in the last 3 months and under 2% for the last 6 months, and today’s 4Q ECI is at 3.5%. 

It is important to remember that the Federal Reserve has a dual mandate: to achieve maximum employment and maintain price stability. The positive side is that the labor market remains strong.

This can be seen via weekly jobless claims at 208,000 (201,000 is the four-week moving average), JOLTs released yesterday that rose to a 3-month high (1.2 jobs available for every 1 person unemployed), and continued strength in non-farm payrolls (January data comes out Friday, but 176,500 is the expectation). 

Considering employment is strong, the Fed can now focus solely on inflation progress – and, as mentioned above, there has been progress. Rents and wages remain the stickier parts of inflation, but both are starting to come down. 

We are closer to seeing the Fed begin to reverse monetary policy. Again, timing is the question. We will get several inflation reports which will serve as valuable indicators for the Fed between now and the March meeting. There is a 37% chance priced into the bond market for the Fed to ease in March. We will be data-dependent between now and then. 

Chart 2: United States Consumer Price Index [2]

Market Reaction

Treasury rates had a somewhat muted reaction with the 10-year and 2-year only falling slightly. This undersized move in rates is due to the Fed’s actions matching consensus expectations before the meeting. The chance of a 25 bps cut for the committee’s March meeting now sits at 36% and an 88% chance of a cut for the May meeting, according to Bloomberg data.

Market indexes had a tough day today as they digested the commentary from the FOMC. In order from best to worst performance: Dow Jones (-0.74%), Equal-weight SPX (-1.20%), SPX (-1.61%), Nasdaq (-1.94%), Russell 2000 (-2.45%).[3] 

We wouldn’t be surprised if there was another pause in March, which was made a possibility at the end of the conference when Jerome Powell stated, “I don’t think it’s likely the Fed will cut in March.” After all, the economy is growing above trend at 3% with consistently strong labor, wage and economic data. We leave you with a tale as old as time: “Don’t fight the Fed.”

Click here to read last week’s Market Note (1/31).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of January 31, 2024.

[2] Source: FactSet (Chart). As of January 31, 2024.

[3] FactSet. As of January 31, 2024.