Feb 1, 2024 - Business

Dealmakers face dilemma after Fed meeting

Illustration of the Wall Street bull melting.  

Illustration: Aïda Amer/Axios

That sound you hear is the whimper of lowered expectations among dealmakers.

Driving the news: The Federal Reserve yesterday poured cold water on the prospect of March rate cuts, saying it needs "greater confidence" in inflation declines.

  • Fed chair Jay Powell did signal that cuts will likely occur in 2024, but that he and his colleagues want to wait.
  • The S&P 500 reacted with its worst day in over four months, shedding 1.6%.

Behind the scenes: Many dealmakers had been expecting imminent rate cuts, which then would lubricate everything from leveraged lending to unicorn valuations to limited partner commitments.

  • No one said out loud that they were banking on a ZIRP return in 2024, if ever, but you could sense lottery dreams lurking behind the cautious optimism.
  • Now everyone's left with the new normal, minus the transitory shimmer. Fundamentals reign supreme, at least for several more months.

The big picture: The U.S. economy continues to be very strong, particularly in terms of GDP growth and labor, which Powell yesterday took pains to emphasize.

  • It's a reality that more and more Americans are beginning to believe in, based on recent polling, despite inflation continuing to outpace Fed targets.

The bottom line: The ball is now in the hands of dealmakers, who had been ramping up activity so far this year. Their choices are:

  1. Take that ball and go home.
  2. Play out the first quarter with the expectation of changed conditions later this year.
  3. Remember how you told everyone that several years of returns were based on easy money, which was never sustainable, and that you're actually kind of glad that sanity prevailed because it will separate the savvy investors from the sheep. And then go do the work.
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