Bloomberg Businessweek (February 6, 2023)
Год выпуска: February 6, 2023
Автор: Bloomberg Businessweek Europe
Издательство: «Bloomberg Businessweek Europe»
Формат: PDF (журнал на английском языке)
Количество страниц: 64
Fighting The Fed
Wall Street wants lower rates. Powell says not yet
There was a time not too long ago when traders were betting the Federal Reserve would start cutting interest rates at its Feb. 1 policy meeting. This was in the summer, when one of those periodic bouts of euphoria was sweeping across markets because, the cognoscenti had determined, inflation would quickly subside and pave the way for the Fed to shift its focus to shoring up growth.
That didn’t pan out, of course. Instead, the central bank’s rate-setting committee nudged up the benchmark by a quarter point, the eighth straight increase since March but also the smallest.
Traders were forced to capitulate months ago and have pushed back their calls for a rate cut to July at the earliest. Yet much of that same inflation-is-about-to-melt-away good vibe has taken hold of markets once again, sparking sharp rallies in the new year in stocks, corporate bonds and cryptocurrencies. Even coins tied to disgraced mogul Sam Bankman-Fried are soaring.
For some observers, there’s a nagging sense that they’re watching a movie playing on a neverending loop, as investors breathlessly push up asset prices in anticipation of a pivot in Fed policy, only to get crushed when Chair Jerome “Jay” Powell and his lieutenants remind them it’s too soon to proclaim that inflation has been vanquished. Last year was brutal for investors of all stripes, and those who bet big on ephemeral rebounds were in many cases burned worst of all.
“I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” Neel Kashkari, the president of the Minneapolis Fed and a former investment banker and trader, told the New York Times recently. He had a warning for investors, too: If they doubt the central bank’s resolve to properly finish the job on inflation, even at the cost of putting millions of Americans out of work, they are mistaken. “They are going to lose the game of chicken, I can tell you that,” he said.
Kashkari’s cautionary words underscore a key point about the latest rally: It’s not helping the Fed quell inflation. Higher stock and bond prices are making millions of Americans wealthier while also making it easier for companies to raise fresh capital they can spend on factories and equipment and new hires. That maybe great in normal times, but when inflation is still enemy No. 1, anything that could stoke additional demand in the economy and further drive up prices is frowned upon in the halls of the central bank.
“The Fed is grappling with a market that doesn’t believe them, and so I think you have to think of the Fed as performative,” said Jason Brady, president and chief executive officer of Thornburg Investment Management, in a Jan. 25 interview on Bloomberg Television. In other words, expect more tough inflation-fighting rhetoric from Powell and the other members of the rate-setting committee. “What they’re saying is what they need to say.”
It’s possible the optimism on trading floors proves warranted this time around and the January rally turns out to be the start of the big, broad market rebound that Wall Street so desperately wants.
The bulls point repeatedly to one thing: Inflation has finally, mercifully, begun to abate. The consumer price index clocked in at an annualized rate of 6.5% in December, down from a high of 9.1% last year. Moreover, there are mounting signs that further declines are to come.
The market is “pricing in rate cuts, it’s already seeing the data roll over,” Kelsey Berro, a JPMorgan Asset Management fixed-income portfolio manager, said on Bloomberg Television on Jan. 25. “So the Fed’s going to keep trying to communicate higher for longer, but the market is already looking through it.”
Both the Fed and Wall Street were blindsided by the inflation spike despite all the warning signs the stimulus-fueled economy was showing in the early days of the pandemic. As prices started to jump in 2021, Powell infamously kept insisting this was a “transitory” blip that would likely fade on its own as pandemic-induced supply chain kinks sorted themselves out-an argument that investors were all too happy to believe. In the early summer of that year, they were betting the Fed would only nudge its benchmark rate a tick higher in all of 2022, bringing it to around 0.4%.
Then, as Powell and company realized they were wrong and started frantically pushing rates higher, investors consistently underestimated their willingness to inflict pain on the economy and markets. This revealed a fundamental flaw in the collective Wall Street mindset. Ever since the late 1980s, traders had been taught that the Fed was always there to prop up financial markets when things got dicey. It would scrap plans to hike rates or maybe even start cutting them. The “Fed put,” they called it, and it was a fine (and highly profitable) axiom to trade on during all those decades when inflation was tame. When that era suddenly and unexpectedly ended, so too should have the blind faith in the Fed put.
But it lived on.
Late last spring, as markets swooned, traders started wagering that the Fed would hit the brakes on rate hikes, at least temporarily, in the fall. Then, a few months later, they determined the central bank would take the benchmark rate no higher than 3.4%. It’s already over 4%-the latest hike took it up within a range of 4-50% to 4-75%-and in a press conference following the announcement of the change Powell said ongoing increases would be appropriate.
Trading in derivatives contracts indicates markets expect the rate to peak at around 4-9% by May or June, then fall below 4-5% by the December meeting, with further cuts indicated during 2024. By contrast, the Fed’s latest forecasts have 17 of 19 officials projecting rates above 5% for the entirety of 2023, with two of them above 5.5%.
Some bond-market veterans aren’t buying it. “There is no way the Fed is going to 5%,” Jeffrey Gundlach, the chief investment officer at DoubleLine Capital, proclaimed in a recent tweet.
This sounds a lot like what was said about 3% and then 4%, but Gundlach seemed to be giving voice to a lot of frustrated investors out there. A few days after the tweet, he told a webcast audience that “40-plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says.” More than half of the investors who responded to a Jan. 29 Bloomberg MLIV Pulse survey said they agreed with him.
There have been moments in recent history when the market has indeed won out, such as when traders wagered the Fed’s rate-hiking cycle that began in late 2015 would end sooner than officials were indicating...
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