Markets may react strongly as the Fed maintains its cautious stance on rate cuts.
Transcript:
KRISTINA HOOPER: I think what the Fed has made clear, not just in Chair Powell’s press conference, but in the minutes that were released, is that the Fed needs to take a wait and see approach, that where the economy is today is one in which we have. We’ve made a lot of disinflation progress, but it remains to be seen whether we can make more, especially given policy uncertainty, what the impact of certain policies could have. And then, of course, you also have to add in that right now at least, the labor market is quite good. Now that could change. And so that could also push the Fed in a different direction. So I think what we’re likely to see is a Fed that doesn’t do anything probably until late in the second quarter, early in the third quarter. But the reality is monetary policy is restrictive as we sit here today, and they’ll admit that it’s just a matter of, hey, we don’t know exactly what policies are going to do this year. So we’ll take advantage of the luxury we have to sit and watch. We’ve made enough in the way of cuts that we don’t think where we are today. We’re not neutral, but we’re not damaging the economy. So we’re just going to sit and wait and look at the data. And so this is the ultimate data dependent environment for the Fed.
So if, for example, we saw enough unemployment that the sum rule was triggered, then I think you would see the Fed act and start to cut. So I think they feel as though they’re in a place now where they have a lot of options, they have a lot of tools at their disposal, and they can move in either direction depending upon the data. Now, you might ask the question, will the stock market be comfortable with this? And I think at the end of the day, the stock market has been quite resilient. But we have to assume that it will react more to data points because it knows the Fed is so dependent. So I would anticipate an environment of heightened volatility, more of an outsized reaction to data points. And it’s not just the traditional data points. It’s a variety of data points, including, for example, consumer inflation expectations. I think that’s gone up a lot. I think it has the power to impact the Fed’s thinking. And so markets could very well react to those prints as well.
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