Suddenly the “Fed pivot” is all the rage… again.
Last Wednesday the Federal Reserve (the Fed) announced that it would not raise its benchmark lending rate again this year. And Fed Chairman Jerome Powell stated that we are “likely at or near the peak rate for this cycle”.
The stock market began ripping higher as those words came out of Powell’s mouth.
As I write, the S&P 500 is now up over 5% in just the last week and a half. That’s a huge move in such a short period of time.
But it wasn’t what Powell said that really kicked the markets into a bullish frenzy. It was the Fed’s quarterly “dot plot”. This is a chart that summarizes the Federal Open Market Committee’s (FOMC’s) collective expectations for interest rates over time.
Now, the FOMC is composed of 12 members. It includes the Federal Reserve Chair, the Board of Governors, president of the New York Fed, and four of the other regional Fed presidents.
The FOMC is technically the Fed’s inner sanctum. It meets eight times a year to discuss monetary policy. The dot plot is supposed to be representative of these insider discussions… which is why the market ripped higher last week.
This quarter’s dot plot shows that FOMC members expect three rate cuts next year and four in 2025. What’s more, the dot plot projects the first rate cut coming in March 2024.
But there’s a nuance here that nobody wants to acknowledge.
Each dot on the chart represents an individual FOMC member’s projection for the federal funds rate over time looking forward. That’s all it is. Each member gets to contribute their own dot.
So the dot plot that sent the markets roaring higher last week didn’t come from Jerome Powell. He gets a dot on the chart just like everybody else… but that’s it. He doesn’t control what the final graph looks like.
That means to analyze the dot plot’s projections, we need to know who is sitting in on those FOMC meetings and placing their dots. And this is where it gets interesting…
Loretta Mester (Cleveland Fed), James Bullard (St. Louis Fed), Susan Collins (Boston Fed), and Esther George (Kansas City Fed) each joined the FOMC earlier this year.
They replaced Lorie Logan (Dallas Fed), Neel Kashkari (Minneapolis Fed), Patrick Harker (Philadelphia Fed), and Christopher Waller (Board of Governors).
If we look at their background and their record within the Federal Reserve system, Mester, Bullard, Collins, and George are each considered to be dovish on monetary policy. That means they favor low interest rates and cheap money.
Then if we look at the records of those they replaced, both Kashkari and Waller have been hawkish. They favored the Fed’s aggressive rate-hiking campaign last year.
And Logan and Harker are both considered centrists. They aren’t as hawkish as Kashkari and Waller, but they do recognize that the Fed can’t permanently keep rates low.
So the four new FOMC members each favor rate cuts. And the four members they replaced did not.
That’s what we’re seeing in this quarter’s dot plot. The dovish members are projecting their own desire to cut rates… and those desires are now largely priced into the stock market.
But here’s the thing – the dot plot has no influence on policy. That’s all Jerome Powell. And he hasn’t said one word about rate cuts. In fact, Powell appears to be the most hawkish member of the FOMC.
So it looks to me like the markets are in for a rude awakening. More on what’s to come tomorrow…
-Joe Withrow
P.S. My new book Beyond the Nest Egg takes a deep dive into what the Federal Reserve’s aggressive rate-hiking campaign last year was really about… and where this is all going.
If you’re interested, you can find the book on Amazon right here. And thanks very much to those who took the time to leave it a review.