Exploring Fed Debates and Future Rate Movements | Episode 178 | 10-09-24

In the latest episode of Markets With Megan, Megan discusses the Federal Reserve's September 50 basis point rate cut, which sparked curiosity and debate across economic spheres. While the move might seem straightforward, the episode reveals the complex dynamics behind it. This is drawing from newly released meeting transcripts. These transcripts offer a glimpse into the deliberations behind closed doors, where Fed Chairman Jerome Powell guided officials towards the rate cut. 

Although only one official dissented publicly, the transcript suggests more officials preferred a smaller cut, signaling a more divided Fed than initially perceived. Discussions focused not only on numbers but also on balancing labor market stability and inflation risks, reflecting the complexity of navigating competing priorities.

The episode also explores the market's reaction to the rate cut, with equity markets responding optimistically while bond markets signaled caution due to inflation concerns. As the Fed looks toward its November meeting, the role of upcoming economic data, particularly employment reports, becomes pivotal in shaping future rate decisions. 

The futures market, now leaning toward a smaller cut, mirrors the dynamic nature of economic forecasting. This episode equips listeners with insights to navigate the uncertainties of monetary policy and market reactions, offering valuable perspectives for investors, policymakers, and anyone interested in economic trends.

That 50 basis point rate cut that we got in September may not have been as cut and dry as the market had taken. That's what the minutes from that actual meeting showed us. Today it is Wednesday, October the 9th, and today we've received the full transcript from the meeting that took place in September. It's important to understand that when the Fed holds meetings for interest rate policy, they come out with a brief statement after the meeting, as well as their decision, and then typically a press conference. It takes several weeks later until we receive the full transcript of the meeting and really get to understand what went on behind those closed doors. And while we did only get one Fed governor that dissented in that meeting in September, it seemed like it was a pretty landslide decision to cut interest rates by 50 basis points. But when you read these minutes, that's not necessarily what it's telling us. In fact there were some officials that would have preferred only a quarter point rate cut, and that is. They don't tell us the exact number, but it's definitely more than one. That basically means that Federal Reserve Chairman Jerome Powell had to come in and kind of push those others over the edge to get to the 50 basis points. All of the officials did agree that some cut in interest rates was necessary. At the time they noted their higher risks to the labor market and then also that there were lower inflation risks. So it did warrant a interest rate cut. But that size of it was what was well debated in that meeting. But what came out of the meeting was, hey, it was 50 basis points and all but one dissented to that.

So what does all this mean? Basically, we're seeing the equity markets taking off. Today we're in triple digits. They're pricing in this perfect soft landing situation for the economy. But what we've seen in the past few days is a big backup in treasury yields, meaning the long end of the curve. The yields in fixed income are rising. We've breached that psychological level of 4% and typically the bond markets do this when they're telling you something else is going on. So bond markets right now are concerned about inflation, especially given that September jobs report, and they are telling you that, hey, the Fed's not going to be able to cut the way that the markets had priced in.

So right now there is basically the futures market, showing a 20% chance of no change at the November meeting and an 80% chance of 25 basis points. So futures market is leaning more towards 25 now instead of 50. And before that that blockbuster jobs report we got last week the futures market was pricing in a 50 basis point rate cut in November. Now the Fed will still get one more employment report before their meeting on November 1st. So that's going to be very important and will dictate exactly what will happen at that November meeting if they will stay on hold or if they will price in for December or if it's a big miss to the downside if that 50 basis points comes back in. So we're watching the fixed income markets closely. We think the equity markets might be getting a little complacent here and we are concerned about valuations at these levels. That's all we have today. If you like this, please subscribe. Hit the alarm bell, share with your friends or colleagues. If you'd like our past podcasts, you can look this up on marketswithmegan. fm. Thank you.