02/01/24 10:24 AM EST

No Cowbell From Powell

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today’s bonus chart shows the Fed funds rate in blue vs. the headline CPI in red. For the most part, Chair Powell remained consistent with what we expected. There were a few surprises. For example, it's unlikely the Fed staff expected him to dismiss a March rate cut outright. There were a few questions we wish were asked in the press conference.

The significant rewrite in the FOMC statement was “The Committee does not expect it will be appropriate to cut until it has gained greater confidence that inflation is moving sustainably toward 2%.” Powell also said, “Let’s face it, this is a good economy.” We wish he was asked if the economy is so good and inflation is not yet 2%, why cut rates at all? 99% of press conference questions were about the timing of rate cuts, not the necessity to trim rates in the first place. One month ago, CME futures predicted a 73.4% probability of a 25 bps cut in the March meeting, now down to 36.5%.

As we go further in the year, the confidence in cuts remains high. With Powell's commentary yesterday that they will not cut until inflation falls BELOW 2%, these remain aggressive. According to the Fed’s own inflation expectations, CPI will not be at the 2% target by July. So why price any cuts whatsoever? Unfortunately, this raises the risk that if cuts materialize by July, it’s likely because something has broken, not because it’s a “maintenance cut” as inflation comes in. By dismissing the possibility of a March cut, Powell may have missed the off ramp to the soft landing.

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