Markets with Megan

In today's episode, Verdence Capital Advisors CIO Megan Horneman discusses the events following the highly anticipated FOMC meeting on January 31st. Contrary to expectations, the Fed took a more hawkish tone, triggering a significant sell-off in the equity market. Chairman Powell's cautious stance on potential rate cuts, emphasizes the risks of premature reductions and the importance of ensuring progress in inflation. Megan challenges the optimism in the futures market, suggesting that the anticipated timing and magnitude of rate cuts may be too ambitious. She provides her perspective on the Fed funds futures market's response, indicating a delayed March rate cut while maintaining projections for cuts throughout the year. Looking ahead, Megan previews upcoming events, such as the jobs report and ISM manufacturing data, which could further influence market dynamics. For questions or comments please reach out to the podcast at Verdence dot com.

Watch today's episode here:  

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today with our regular segment of Markets with Megan and we want to discuss what happened yesterday actually on Wednesday, January 31st with the FOMC. This meeting was highly anticipated. There was not any no expectation of any rate cuts or changes to monetary policy. During the meeting, however, there were a lot of speculation, a lot of people hoping that the Fed would, in their comments, open the door for potentially cutting interest rates as early as March, but they did not deliver on that. In fact, he took a little bit more of a hawkish tone. We'll delve into some of the comments that he made, specifically in the press conference, and then what we see going forward. So he did mention that Fed policy is likely at its peak, and that is something that we had also forecast. However, we think that they're going to have to remain on hold for longer than what the futures market is pricing in. What the Fed pal said was that reducing rates too soon could result in a reversal in the progress in inflation. They're waiting for better confidence that inflation is actually coming down, but what he did reiterate multiple times is that their target is still 2% for core PCE. We're about 2.9% now, so they are not there. He didn't remind investors that we're not there yet. They don't think. He actually was asked point blank about a rate cut in March and he said he does not think that is a possibility.

What happened with the results in the market was that the equity sold off. They were pricing in perfection and pricing in the fact that he would come in with this dovish rhetoric and instead he pushed back. And this is good, because it's very easy to reignite inflation and we're seeing some optimism come back into the economy, since equities have rallied and six interest rates have come down and since those expectations of rate cuts for this year, these things are all on risk. The Fed's walking a very fine line. Now what happened after the meeting, aside from the equity market selling off pretty substantially yesterday, is that the Fed funds futures market. They pushed out the March rate cut, but they didn't change the amount of rate cuts that are expected this year. So futures markets are still expecting between 100 and 150 basis points of rate cuts this year.

We think it's still a little too optimistic that they're going to be able to cut as quickly and as much as the market is pricing in. We'll get the jobs report this week as well and we'll continue to watch some of those sticky inflation data, specifically from the wage pressures that the Fed did comment on. These are things that we think will cause some volatility in the market, specifically around those timing and magnitude of Fed rate cuts that we'll get this year. That's all we have today. We'll be back again with the ISM manufacturing and then, like I mentioned, the jobs report later this week. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you.