The Fed Didn’t Really Surprise Anyone

The Fed Didn’t Really Surprise Anyone
Stéphane Renevier, CFA

24 days ago3 mins

What happened?

It was the same old, same old: the Federal Reserve (the Fed) didn’t throw any curveballs with its latest announcement, opting to keep interest rates snugly in the high zone they’ve occupied for a while now.

That being said, the Fed laid it all out: definitely no more rate hikes (yay), but no rate cuts in March either (boo). And since the yay was widely expected but not the boo, stocks slumped on the news.

What does it mean?

Well, the Fed’s giving itself a pat on the back, satisfied with the progress made thus far in its battle royale with inflation. A hint of victory was in the air as the central bank pointed out that the risks of spiraling unemployment and inflation are finally becoming aligned. And to be fair, the past six months of data show there’s reason to be smug.

The obvious good news here is that the Fed’s stepping off the interest rate gas because inflation is on a leash, dropping closer to that all-important 2% target, particularly in the past half-year. So there’s no need to slap the economy with more rate hikes right now.

But, then, play so hard to get with rate cuts, you ask? Well, if you look back at the past 100 bouts of inflation, you’ll see that price increases can be a sneaky beast and likes to rear its ugly head when it’s least expected. Having been caught off-guard once, the Fed’s not eager for a sequel – and it’d rather avoid touching those rates until it’s sure that inflation’s good and truly gone for good.

Besides, from the Fed’s point of view, the economy doesn’t desperately need a rate-slashing: with a strong job market and decent growth, it’s clearly got the chops to handle the current 5.25% to 5.5% rate levels – even if that is a 23-year high. There’s also a strategic communications play at work here: the Fed doesn’t want to spark an asset-buying frenzy in the markets by teasing potential cuts (which is sort of what happened a few months ago when it “pivoted” and started hinting about rates).

And, anyway, the Fed’s got another, quieter reason to be smug – and it’s one that’s not making many headlines. See, financial conditions have actually remained extremely “loose” and accommodating, despite those aggressive rate hikes. Thanks to a cocktail of government spending, injections of money (liquidity) into the system, and rising stock and bond markets, we’ve seen a sort of undercover relief that’s making it still cheap and easy for companies to finance themselves, softening the blow from all those hefty interest rates. It’s almost as if the Fed’s already made a few stealth rate cuts without making a whole song and dance about it.

Why should you care?

In my view, the meeting this week was like old news that suddenly goes viral again. Yep, the odds of a March interest rate got longer: with just 30% of investors taking that bet after the announcement, rather than the 50% before it. And, nope, the stock market wasn’t exactly happy about it. But when you zoom out, the big picture hasn’t changed: the Fed’s on a path to dialing back its aggressive stance at a measured pace, keen on not cutting rates before it’s absolutely necessary. When that actually happens might not be as crucial as you might think.

What matters more is what happens next. The good news is that as long as inflation edges toward the target, and interest rates stay in the high zone, the Fed’s got plenty of room to soften any potential blows – with some stimulative rate cuts. The bad news is that inflation could still crash the party again, and the delayed effects of past rate hikes still could sneak up and kneecap the economy. For now, markets are still focusing on the former. Let’s hope it lasts.



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