The Fed is committed to growth

Paid subscriber analysis

On Wednesday, during the Powell presser, I wrote a quick reaction to the FOMC decision, their new dot-plot chart, and revised Summary of Economic Projections (SEP). The key decision this time was not the rate itself, but the projection of rate cuts until the end of 2024.

We gave three scenarios on Tuesday: a bullish, a bearish, and a neutral one. The actual policy decision came really close to the first one: the Fed committed to 3 rate cuts before the end of 2024, and that was perceived as bullish, so markets rallied immediately.

We were expecting (hoping for, really) a more bearish scenario, in which, because of the latest two hotter inflation prints and easing financial conditions, the Fed would do only two cuts this year, and shift more for next year. The logic was that they would want to send a signal to kill inflation in the short run, opening room for a more robust economic expansion coming into year-end. The proper soft landing.

However, as soon as the policy decision came in, and especially after Powell confirmed the narrative, there was no way left to go but up.

So why the initial cause of concern on Wednesday (I published it in the middle of the speech)?

Well, because of this:

Yes, the rate cuts were unchanged and this was, as suggested the day before, bullish.

However, look at GDP growth, unemployment, and inflation projections for 2024. The Fed is cutting 3 times in an environment where they expect growth to pick up significantly (70 basis points, or 50% higher than the December projection), unemployment to go down slightly, and core inflation to pick up.

In other words, the Fed is stimulating an already strong economy (low unemployment, higher growth, sticky inflation).

Let’s try to understand why.