Bonds and Fixed Income

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>>> The Fed’s massive economic upgrade: Chart of the Week


Yahoo Finance

by Ethan Wolff-Mann

Mar 23, 2024


https://finance.yahoo.com/news/the-feds-massive-economic-upgrade-chart-of-the-week-123035274.html


Ahead of the Fed’s meeting this week, everyone was focused on dots.

But the most important number offered by Fed officials was the FOMC’s surprisingly bullish expectations for economic growth, revised upward, as our Chart of the Week shows.

In December, the market cheered after hopes for rate cuts were restored following pleasing inflation numbers. But economic growth projections for 2024 had fallen to 1.4% from September’s 1.5% projection for 2024 GDP growth.

Now, though disinflation may have stalled in comparison to December, the FOMC projects 2024 growth at 2.4%, almost double forecasts from just three months ago. And with an optimistic Fed holding its expectations for three cuts this year — the most important old number — this confirmation that the economy is expected to stay strong has helped push stocks to new highs.

There’s an old market saw that says lower rates are good for stocks. But so too are a strong job market and a healthy consumer, which are good for profits and, in turn, good for stock prices. Throw in a long-awaited boost in worker productivity and things look even better.

The Fed’s bullish growth projections, even with an expectation that 2025 growth moderates, are a certification from the central bank that the market is right.

While breathless AI energy has boosted the S&P 500, very real earnings buttress these high prices across the index. The job market remains healthy. The consumer is spending. And as a bonus, the Fed doesn’t see these trends as inflationary.

“If what we're getting is a lot of supply and a lot of demand … that supply is actually feeding the demand, because workers are getting paid and they're spending,” Fed Chair Jay Powell said during his press conference this week, likening the economic situation to last year when inflation fell as the economy grew. A strong economy — and strong stock market — are by no means incompatible with Powell’s mandate and mission.

The only fly in the ointment, then, is that money is expensive as long as rates are high, pushing companies towards efficiency (earnings!) rather than chasing growth and continuing the housing market’s frustrations.

So as reporters tried to coax out hints to the Fed’s plans during the press conference, Powell consistently channeled Patrick Swayze in “Roadhouse” in his responses. How will we know when the Fed will cut? “You won't. I'll let you know.”

By now, we all know what we’re waiting for: convincing inflation data, full stop.

And the fact that neither we nor Powell have seen it yet underscores the fact that obsessing over when the next cut will be may not be the best use of our time.

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