March 2024

March rounded out a quarter in which the equity market was cheered by the prospect of lower interest rates despite rising rates across the yield curve.  Members of the open market committee, the arbiters of interest rate policy, continue to espouse three rate hikes this year despite continued solid economic growth.  Given that backdrop, it appears that Chairman Powell and his fellow committee members are as wrong on their interest rate forecast as they were when they tried to calm concerns when inflation first appeared three years ago.  The calming words that inflation would prove “transient” quickly devolved into the worse inflationary impulse in decades.  Then at the December 2023 FOMC meeting the committee forecast that the rate rising cycle was not only over but expected to reverse much of the rate rise over the coming two years, with the first rate cut coming in March 2024.

Undeterred, at the March meeting the Fed’s forecast continued to call for three rate cuts this year, which left many in the capital markets scratching their heads.  The current economic fundamentals in the U.S. are without a doubt, strong.  Witness the March employment report which showed 303,000 new jobs were created in the month, bringing the average monthly gain in jobs over the last four months to 279,000 and the unemployment rate down to 3.8%, both indications that the economy is on the verge of overheating.

Anticipating the combination of an overheating economy and easier monetary policy, the stock market staged a remarkable rally with the S&P 500 rising more than 10% in price for the quarter.  That rally brought to mind Former Fed Chairman Alan Greenspan’s “irrational exuberance” quote during the dot.com boom of the 1990’s.  In fact, the current market shows similarities to that time in that investors believe the promise of artificial intelligence will increase productivity and profitability across all sectors.  Leading the way are a select few companies colloquially called the magnificent seven.  The companies that comprise the category are Alphabet, Meta, Nvidia, Tesla, Microsoft, Amazon, and Apple.  Interestingly, Apple and Microsoft were companies that led that stock price frenzy that led to Greenspan calling the market action irrational.  Of course, his description of the buying in 1996 was early as equity price indices continue to climb through 2000, until stock prices entered a multi-year bear market that saw indices fall nearly 50%.

We’re not holding that historical price action as an allegory for what to expect from stock prices in the coming years.  We make the point because it shows the absurdity of the open market committee’s forecast for rate cuts in the coming year.  A stock market rally like we have seen in the last 6 months is indirectly an easing of monetary policy as equity holders feel the wealth effect of rising stock prices.  For the Fed to cut interest rates simultaneously with over exuberate stock prices is unlikely to help keep inflation at bay.  In fact, it’s likely to stoke the current level of inflation which has stalled just below 4%.  Moreover, with their policy of open lines of communication, their forecasting error is publicly communicated which serves the average consumer to worry that inflation is going to be a permanent problem and they’ll need to take action to protect their finances, which is a recipe for a wage price wage spiral.

We’d prefer to see the Federal Reserve return to the invisible hand that adjusts monetary policy from behind the scenes.  Their high-profile forecast is causing many to lose confidence in their abilities.

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