The most electrifying three weeks in sports is almost upon us, when upsets, buzzer-beaters and Cinderella stories dominate the lexicon of America. Around the time the NCAA tournament begins and millions of traders become consumed with basketball, the Federal Reserve also tips off what should be a pivotal March meeting.
Setting the Stage
After the furious rally in November and December, markets entered 2024, pricing in 5 to 6 interest rate cuts in 2024 and several more in 2025. However, this rally also caused financial conditions to loosen dramatically. The strong rally in equities, credit spreads and U.S. treasuries diminished the impact of all the FOMC’s interest rate increases. When teams entered the heart of conference play in January and February and needed to raise their intensity, economic data began re-accelerating. Market expectations for the path of interest rates proved overly optimistic, and interest rates moved sharply higher, triggering losses anew in fixed-income portfolios. It remains to be seen whether some of the stronger-than-expected data was an anomaly due to unpredictable January seasonal adjustments or an actual pickup in economic activity. The Fed will benefit from several more important data releases before they lock themselves in a room for two days. After this pivotal meeting, we will have the doubleheader of an updated Summary of Economic Projections and the standard Jerome Powell press conference.
Let the Prognosticating Begin
Fed governors updating their Summary of Economic Projections dot plots are like the NCAA selection committee sweating over the final iteration of the tournament bracket. They will assess enormous amounts of data, knowing millions will be parsing the disclosure with a fine-toothed comb. Just as basketball fans will immediately start to fill out brackets and project their Final Four, bond investors will revise their projections for the timing and amount of rate cuts. But there is a crucial difference. Joe Lunardi’s weekly Bracketology updates have conditioned fans on which teams should be in or out, and aside from a few teams on the bubble, expectations are well-defined, and there are usually few surprises.
The Lights Are On—Let the Maddess Begin
Jerome Powell and his colleagues have used recent speeches and newspaper articles written by Nick Timiraos to tamp down rate cut excitement, and this has helped move projections from 5-6 cuts this year to 3-4 cuts. But financial conditions are still accessible, animal spirits are alive and the bond market is wide open, as evidenced by exceedingly tight credit spreads and massive issuance of investment-grade and High-yield bonds. We know that the Fed is focused on risk management—balancing the dangers of slowing the economy too much and triggering job losses versus not cooling the economy enough and allowing inflation to reaccelerate or perhaps even become entrenched. It feels like a time when markets are vulnerable to an upset. Instead of projecting three rate cuts in 2024, the FOMC should shave it to two rate cuts and indicate fewer cuts in 2025 as well. This result would get traders’ attention even amidst the pull of basketball.
Just as a blue-blooded favorite narrowly avoiding an upset against a 16 seed can propel them on a deep tournament run, a well-orchestrated SEP update combined with a Powell full-court press may cause volatility in the short-term, but it would eventually refocus markets and improve the chances of a longer run of economic expansion while avoiding the need for a harder landing. This could indeed be Chairman Powell’s One Shining Moment.
Jeffrey Rosenkranz is a Portfolio Manager for the Shelton Tactical Credit Fund and the Firm’s fixed income separately managed accounts.