Halyard’s Weekly Wrap – 3/22/24 – Fed raises growth and inflation forecasts but stands firm for 3 rate cuts in 2024. 

As expected, the FOMC left the Fed Funds corridor unchanged on Wednesday.  Mildly surprising to us though, their economic forecast continues to indicate that they expect to cut the overnight rate three times this year.  As we’ve written on numerous occasions, the job market remains robust, and the consumer price index has stabilized at the mid-3% level, well above the Fed’s stated target.  The question being asked, is there an imminent threat to economic growth that the Fed is aware of, but the rest of the investing community is not?  Especially since a popular financial conditions indicator, which aggregates broad financial conditions such as interest rates, equity prices, and credit spread is showing that financial conditions have eased since last fall.  Why then is the Fed threatening to ease policy?

The reaction to the dovish meeting was a continued rally in equity prices, with the move broadening from the “magnificent seven” tech companies that have been driving the indices higher this year.  The long held “buy the rumor” effect has been especially evident in the stock price of home builders.  The home builder ETF (XHB) has rallied more than 30% since December when the Fed first signaled their intention to cut rates three times this year with the ETF rallying nearly 4% since the Fed reiterated that intention on Wednesday.

Digging further into the economic projections left us scratching our heads.  In addition to the three rate cuts expected this year, the committee boosted their forecast for growth.  GDP for 2024 was lifted to 2.1% from 1.4% forecast at the December meeting and the expected growth in 2025 and 2026 is forecasted to expand at 2.0% in both years.  The unemployment rate is expected to bounce narrowly between 4.0% to 4.1%.  None of those forecasts argue for near-term rate cuts.

From an economic fundamentals perspective data this week portrays an economy continuing to hum along.  Initial claims for unemployment insurance are tracking at the low end of the range and existing home sales last month were at the highest rate in a year.

For the week, interest rates drifted lower with the 2-year note falling 13 basis points to 4.59% and the 2-year/30-year spread narrowing 9 basis points.

The calendar of Fed speakers is somewhat light next week.  Typically, the calendar would be full as committee members support the Chairman’s message in the week following the meeting.  The economic calendar is full though, with a bevy of data every business day.