Investors Await Federal Reserve Chair Powell’s Remarks

According to Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income and Head of Global Allocation Investment Team, investors will be closely monitoring Federal Reserve Chair Jerome Powell’s upcoming speech on Wednesday. They will be particularly attentive to any indication of pushback on the recent easing of financial conditions. Rieder highlighted that the markets were energized by Fed Governor Christopher Waller’s recent comments about the potential for interest-rate cuts if monetary policy seems too restrictive amidst easing inflation. Waller’s statement, made in late November, received a standing ovation from the markets, especially considering his reputation as one of the more hawkish members of the Federal Open Market Committee.

Market Updates

The S&P 500 index closed on Tuesday at its highest value since January 14, 2022, resulting in a year-to-date gain of nearly 21%. Investors took into account fresh inflation data from the consumer price index, which indicated that the rate of inflation in the United States had slightly slowed to 3.1% over the 12 months through November, according to Dow Jones Market Data.

Eased Financial Conditions

BofA Global Research has reported a significant easing in financial conditions since the Federal Reserve’s policy meeting on November 1. This has led to a rally in the US stock market, a decline in Treasury yields, narrower corporate credit spreads, and a weakening of the US dollar. BlackRock’s Rieder acknowledged this shift in financial conditions as significant, adding that unemployment remains solid. Consequently, the Federal Reserve has the opportunity to exercise patience before considering any further adjustments to interest rates.

Inflation Concerns

While inflation has been showing signs of easing, it has not yet reached the Federal Reserve’s target of 2%. Excluding energy and food prices, core inflation in November remained at an annual rate of 4% based on the consumer price index.

Federal Reserve to Maintain Current Rate Amidst Declining Inflation

The latest Consumer Price Index (CPI) data, released on Tuesday, indicates a significant decrease in inflation since last summer. Yardeni Research notes that this decline is particularly evident when excluding shelter costs, although the decrease in shelter costs has been slower. Federal Reserve Chair Jerome Powell is expected to reiterate during his press conference on Wednesday that core inflation still remains high and that the Fed is not in a hurry to lower interest rates.

In an effort to combat inflation, the central bank has maintained its benchmark rate at a range of 5.25% to 5.5%, which is the highest it has been in 22 years. Investors anticipate that the Fed will announce its decision to keep the rate unchanged after the conclusion of its two-day policy meeting on Wednesday.

At 2 p.m. Eastern Time, the central bank will release its policy statement and a summary of economic projections. Following this, Chair Powell will hold a press conference at 2:30 p.m.

Michael Rieder, an expert in financial projections, suggests that the Fed officials’ 2024 forecast may indicate a potential 1.5% increase in gross domestic product (GDP) with inflation easing to approximately 2.5%. Rieder believes that under these expected conditions, the Fed may begin cutting rates around mid-2024. Keeping the benchmark rate at its current level would be illogical in this scenario, and Rieder predicts that the projections could show a 50 basis points rate cut next year. While a median projection of a 75 basis points rate cut would be surprising, Rieder deems it within the realm of possibility.

Traders in the federal-funds futures market are forecasting a potential rate cut as early as May, according to the CME FedWatch Tool on Wednesday.

Meanwhile, in terms of bond market investments, Rieder has been reallocating his investments from the front end of the yield curve to the “belly,” which comprises of debt maturing in three to seven years.

At the time of reporting, the yield on the 10-year Treasury note was trading down about four basis points at approximately 4.16%, compared to around 5% in October.