Markets with Megan

In the latest episode of "Markets with Megan," Chief Investment Officer Megan Horneman talks about the recent Federal Reserve meeting and press conference led by Jerome Powell. Megan provides a comprehensive overview of the decision to maintain unchanged interest rates, while discussing the sentiments suggesting potential rate cuts in 2024. She focuses on key points from the press conference, such as the Fed's cautious stance on interest rates, reduced inflation expectations, and a dovish outlook on economic growth. Highlighting the committee's acknowledgment of potential weaknesses in the economy and the expected easing in the job market, Megan notes the positive impact on equities and significant changes in bond market yields.

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan, and we wanted to discuss the Federal Reserve meeting and the press conference that we just had, where Jerome Pal addressed the results of this meeting. It was widely expected that they would keep interest rates unchanged and they did. However, the tone in the press conference and in the comments in the statement, in the dot-plots where they give forecasts for the coming years, these were all pretty dovish. So the market's expecting that there is about three to four rate cuts on the horizon in 2024. The Federal Reserve, you know. I'm just going to dig into a couple of the comments. The dovish side of him said that the committee may be at or near the peak in interest rates. They did, as I said, price in three to four rate cuts for next year. They did reduce as well their expectation for inflation. Their prior meeting core inflation was going to be about 2.6 next year. They reduced that to 2.4. And they made several comments about how they have moved well into restrictive territory. So it sounds like it is setting up the investors for the expectation for rate cuts next year. They also were dovish on growth and this is something we've been talking about that we think some of the strength we've seen in the economy wouldn't be lasting. The Federal Reserve is now finally starting to recognize that. They have mentioned that the full effects from policy have likely not been felt and that they expect the easing in the job market to continue Again something we've noted that this is a lagging indicator and we should see further weakness going into 2024. They did reduce their expectations for economic growth for next year. This year is going to be about 2.6 percent, but then slow to an annual pace of 1.4 next year. The unemployment rate stayed unchanged from their expectation at the September meeting. It will be about 4.1 percent next year, so an increase from current levels.

But I do want to highlight some of the other things they did. They kept the door open in the event that they need to do more with rate cuts or if they actually even need to hike interest rates. They made mention and it's far too early to declare victory on inflation and the economy, and they also did mention that they are open if they need to further increase interest rates if inflation does reignite One of the things they mentioned that I know this is going to win a lot of investors' minds is the ill-oppressantial election next year, and they did make a note that they do not think about politics. They're going to do what's right for the economy. They also did. There was a good question, which I think it's something that a lot of people will think about going into next year Can they continue this quantitative tightening, the reduction in their balance sheet, if they are on the path to cut interest rates? That's something that he said. It's going to depend on why we're cutting interest rates. If it's because the economy is slowing substantially more than expected, that could result in maybe a pause in the QT program as well. But if it's just a normalization, then they think they can do both of these side by side.

From a market perspective, equities loved this meeting today and all the results after it. The Dow Jones industrial average now hit a record high. The S&P is a little off of its record high. The biggest beneficiary of this was in the bond market. We're looking at 10-year rates that were about six weeks ago about 5%. The 10-year yield now is almost going to break below that 4% level. The very short-term rates, two-year yields they did see the biggest decline in the yield. We fell about 30 basis points today alone after this meeting. So again, the market likes this. They're setting up for the expectation of this perfect soft landing.

We're still skeptical on this. We think that the economy is going to continue to slow in the first half of next year. Rate cuts, I think, would be maybe in the second half of next year, if not in 2025. We have to get inflation down to that 2% level. Even their expectation for core PCE for next year is still 2.4%. There is some time here before we can get to that 2% level. We've mentioned many times it's very easy to reignite inflation. Look at the market today. This is asset price inflation. With what we're seeing in this rally, this is a very fine line that they're walking, where they don't reignite some consumer optimism and then we feed this vicious circle on inflation. So we will continue to watch all the economic data. We'll welcome the rally today. It's a Santa Clause rally that we're seeing here over the past few weeks and we'll be back with some more economic data and market movements. If you have any questions at all, please feel free to reach out to podcast at Verdence dot com. Thank you.