The Fed loosens the money taps
“The pivot is finally here,” says Russ Mould of AJ Bell. Traders have been betting for weeks that the US Federal Reserve will start cutting interest rates next year, which typically boosts stock prices. Now Fed chair Jerome Powell has confirmed their hunch, saying that the US central bank has started to discuss easing monetary policy. The news sent the Dow Jones stock index to a fresh record high, while the S&P 500 benchmark has notched up seven successive weeks of gains for its best streak since 2017.
Traders had spent much of this year bracing for interest rates to remain “higher for longer” as part of the battle with inflation, say Harriet Clarfelt and Kate Duguid in the Financial Times. Now they’re not so sure. The Fed is signalling that it could cut rates three times next year (each cut one of 0.25 percentage points). The yield on the US ten-year Treasury bond, a benchmark for borrowing costs, has fallen below 4% for the first time since August.
“So much for” Jerome Powell’s inflationfighting “tough guy act”, says Michael Lewitt in The Credit Strategist Blog. The Fed chair has instead returned to one of his previous roles, that of a sweet talker who spoils markets with easy money. As usual, investors have got carried away. Where the Fed is currently pencilling in three interestrate cuts next year (which already seems too many), bond markets have decided to price in six. Wall Street’s financiers need little excuse to “unleash another cycle of speculation and debt accumulation”.
The S&P 500 has gained 15% since investors started betting on a rate pivot in late October, says John Authers on Bloomberg. The powerful rally leaves equity bulls in a quandary: “shifts in asset prices that we might have expected by the end of next year” have now already been priced in, leaving little further upside in view for stocks in 2024.
Bank of England stays hawkish
On this side of the Atlantic, central banks “refused to join the... pivot party”, says Ipek Ozkardeskaya of Swissquote Bank. Last week, the Bank of England’s Monetary Policy Committee again held rates at 5.25%, but three of the nine members wanted another hike. The Bank remains concerned that resilient wage growth heralds persistent UK inflation. Similarly, European Central Bank (ECB) president Christine Lagarde said that the ECB “did not discuss rate cuts at all”.
The transatlantic gap makes little sense. US data continues to come in strong, suggesting the Fed should stay on guard against an overheating economy. Meanwhile, European economies are “faltering”. While that is bad news, it should at least cool inflation faster and allow European interest rates to fall. “Something is amiss.”
“Looser money” would be “far more appropriate in Europe than… in America,” agrees The Economist. Influenced by the famously hawkish German Bundesbank, the ECB has “overtightened” before – both in 2008 and 2011. It could be at risk of doing so again. By contrast, the US labour market is still “too hot”, which calls for tighter money. Credit-happy Americans risk revving up inflation again.