A trader works, as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 13, 2023.
Brendan Mcdermid | Reuters
It appears that financial markets, especially in the United States, voracious beasts: They never appear to be satisfied even when they get what they want.
Federal Reserve chairman Jerome Powell in his “60 Minutes” interview, which aired on Sunday, confirmed what the markets apparently already knew as of last Wednesday. That is, the Fed is pivoting toward cutting interest rates — not in March but sometime later in the year — and the central bank is expecting to reduce short-term interest rates three times in 2024.
In fact, Powell told “60 Minutes” correspondent Scott Pelley that many of the members of the policy-setting Federal Open Market Committee think the time for rate cuts is approaching.
“All but a couple of our participants do believe it will be appropriate to, for us to begin to dial back the restrictive stance by cutting rates this year,” Powell said, according to a transcript of the interview. “And so, it is certainly the base case that, that we will do that. We’re just trying to pick the right time, given the overall context.”
A good economy and a cautious approach
“This is a good economy,” the Fed chief told Pelley.
Despite the subsequent jump in interest rates on Monday and the S&P 500’s pullback from record levels, both Wall Street and Main Street should be celebrating the Fed almost openly declaring victory in the post-pandemic war on inflation.
I never believed that the Fed would cut interest rates in March nor cut them as many as six times this year.
I believe the first cut will come in May, and I anticipate central bank policymakers will cut three times, possibly four, before the year is out.
While it’s often said that interest rates go up an escalator and come down in an elevator, I believe this cycle will show itself to work in reverse.
The Fed was late to begin tightening monetary policy after the pandemic.
As a result, the central bank pushed the penthouse button on the elevator, raising rates rapidly. It will likely either ride an escalator back to the first floor, or even walk down the stairs, when cutting rates this year and into 2025.
That, of course, could change should the economy slow significantly, or should the unemployment rate rise rapidly.
The reverse could also be true.
If economic growth accelerates beyond current forecasts and risks a rise in inflationary pressures, the Fed could keep rates where they are or raise them further.
But the latter scenario is not the central bank’s base case.
In his interview, Powell also noted that pressures in the commercial real estate space could result in some smaller banks closing. This would force consolidation and shuttering among institutions with too much exposure to troubled debts in that sector of the economy.
However, Powell said he doubts that this poses the type of systemic risk we witnessed in the Great Financial Crisis in 2008.
It’s also interesting to note that the Fed chair pointed out that the U.S. has a dynamic, innovative economy – and that the nation has been an indispensable leader on a global level.
“Our engagement with the world is enormously beneficial to our country,” he said.
It’s interesting to note that key markets appear to be fretting less about intensifying conflicts and appear to be “pricing in” a resolution to at least one: the on-going violence in the Middle East.
Instead of a sharp surge in energy prices – even as shipping has been disrupted for reasons well known – energy prices have been well-behaved at least.
West Texas Intermediate crude futures are trading at roughly $72 per barrel as record U.S. production is offsetting global supply concerns.
Natural gas, heating oil and gasoline prices have also cooled considerably.
Wall Street should take heart.
The U.S. has a lot going for it right now, all variables notwithstanding.
Bobby McFerrin would say, “Don’t worry. Be happy.”
— CNBC contributor Ron Insana is chief market strategist at Dynasty Financial Partners.