Everyone is asking the wrong question about the Fed.
Everyone has been debating whether or not they’ll cut in March and just how many rate cuts will happen this year.
Yet no one can actually explain why that matters.
It’s as if people are playing roulette like is done if a business will put out .001 or .002 in a given 90-day period.
What matters for stocks is the long end of the currently inverted yield curve, of which a matter of 6 weeks has virtually no effect.
What ultimately will matter is what the neutral rate is.
The fed’s dot plot indicated the neutral fed funds rate is around 2.5%, but a very heavy bias to it being higher than that.
When discussing the lack of effect on the economy after the rate increases, Powell begged the question: “what does that tell you about the neutral rate”
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A Benign Fed, But Stimulus Coming?
- This opens a return to normal for markets, one without a heavy fed overhang
- When looking at the numbers Ex-Fed, things aren't amazing
- Earnings yields near record lows ex-dot com, GFC, and Covid crash
- Cuts will come, towards neutral, but not a return of ZIRP
- Economy expected to slow further, savings continue to be depleted, can't ignore signs of slowing on company earnings
- Not seeing catastrophe in oil, OPEC wants an unusual lack of Q1 inventory builds
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Sell The News?
- Waller very vague, talking about a tautology in the future, very much anticipated by markets
- Multiples remain at post-dot-com highs, outside covid, outside GFC, lowest earnings yield as well, virtually all time lows, and lower than risk-free yields
- Cutting rates will only make most sense if economy slows, as Waller says is happening, and that is unlikely to jive with earnings expectations, which Waller expects to come down
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