Stronger signaling from the Federal Reserve that interest rate cuts are on the menu in 2024 understandably sent both stocks and bonds soaring on Wednesday. I argued several weeks ago for some number of non-recessionary rate reductions next year given the decline in inflation, but markets are now priced for over 150 basis points of policy easing, a scenario that’s unlikely to be stimulative for stocks.

The earnings boom that equity investors appear to be anticipating would require an economy where 150 basis points of cuts are unnecessary, and on the flipside, the world in which we really do get such sharp reductions probably isn’t one where stocks thrive. So, have bond markets rallied too far or equities?

The case for a few rate cuts even without a deterioration in the labor market or pain in financial markets is easier to make now that the Fed has blessed that outcome, with the median Fed member projecting a 0.75% decline in the fed funds rate in 2024 to a range of 4.50%-4.75%. That’s led markets to race ahead. Surely, the thinking goes, the Fed has laid out the bare minimum, and trends in the economic data make a greater number of cuts worth betting on.

QOSHE - The Stock-Bond Party Is Running Out of Punch - Conor Sen
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The Stock-Bond Party Is Running Out of Punch

4 0
15.12.2023

Stronger signaling from the Federal Reserve that interest rate cuts are on the menu in 2024 understandably sent both stocks and bonds soaring on Wednesday. I argued several weeks ago for some number of non-recessionary rate reductions next year given the decline in inflation, but markets........

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