The stock market wants some bad news
Last month, the Fed cracked open the door to the possibility of interest rate cuts. This year, the stock market will want the central bank to make good on that.
Why it matters: The tension between a stock market that's fixated on getting lower interest rates and a Federal Reserve that's leery of giving them before fully killing off inflation seems set to dominate markets in early 2024.
State of play: The Fed policy committee's projections suggest as many as three rate cuts over the next 12 months, though they don't specify when they may materialize.
Yes, but: Market participants are nearly certain they'll start in the first quarter.
- Market-derived odds of a cut at the Fed's March meeting are over 80%.
What they're saying: Assorted Fed committee members have been hitting the circuit to try to tamp down expectations for cuts.
- "We aren't really talking about rate cuts right now," New York Federal Reserve president John Williams told CNBC's "Squawk Box" last month.
Thought bubble: Good luck with that. As wise market-watcher Selena Gomez once said, "The heart wants what it wants." And there is no more heartfelt passion among equity investors than for interest rate cuts, which for various technical reasons, have the quasi-magical effect of raising market valuations across the board.
- It's free money, more or less, at least as far as the stock market is concerned. And the markets like free money.
Between the lines: One way to square these two competing desires — the Fed's wish to finish the job on inflation, and the stock market's desire for free money — is fairly straightforward: an economic slowdown. That bad news would ease the Fed's mind about delivering on the rate cuts it heretofore dangled.
The bottom line: Of course, the strong economy stymied expectations for a downturn all of last year.
- Still, it wouldn't be surprising to see the S&P 500 rally a bit on weaker economic data, which would help turn investors' hope for a helping hand from the Fed into a reality.