The market is a forward looking mechanism that correctly anticipated that two subsequent pauses by the Fed will translate into the potential for rate cuts in 2024. Jay Powell’s comments earlier this week indicating that inflation has indeed slowed and that the internal conversation at the Fed has now shifted to rate cuts fueled a massive rally this week. You can find the full transcript of his comments here. The part that stood out the most was:
“In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate based on what each participant judges to be the most likely scenario going forward. While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table. If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6 percent at the end of 2024, 3.6 percent at the end of 2025, and 2.9 percent at the end of 2026, still above the median longer-term rate. These projections are not a Committee decision or plan; if the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals.”
The market has started anticipating as many as six rate cuts next year and investors might be getting a little too giddy in their optimism. Instead of focusing on a specific idea in this mid-month update, I wanted to delve a little deeper into a sentiment indicator we have used a lot the last couple of years and what it is telling us now. But before I do so, I wanted to highlight seven ideas we have recently discussed that continue to look attractive to me and might provide a good opportunity for entry if this euphoria subsides.