Markets may react strongly as the Fed maintains its cautious stance on rate cuts.
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00:00What the Fed has made clear, not just in Chair Powell's press conference, but in the minutes that were released,
00:06is that the Fed needs to take a wait-and-see approach.
00:12That where the economy is today is one in which we've made a lot of disinflation progress,
00:22but it remains to be seen whether we can make more,
00:25especially given policy uncertainty, what the impact of certain policies could have.
00:30And then, of course, you also have to add in that right now, at least, the labor market is quite good.
00:37Now, that could change, and so that could also push the Fed in a different direction.
00:43So I think what we're likely to see is a Fed that doesn't do anything,
00:47probably until late in the second quarter, early in the third quarter.
00:50But the reality is monetary policy is restrictive as we sit here today, and they'll admit that.
00:56It's just a matter of, hey, we don't know exactly what policies are going to do this year.
01:01So we'll take advantage of the luxury we have to sit and watch.
01:07We've made enough in the way of cuts that we don't think where we are today.
01:11We're not neutral, but we're not damaging the economy.
01:13So we're just going to sit and wait and look at the data.
01:17And so this is the ultimate data-dependent environment for the Fed.
01:21If, for example, we saw enough unemployment that the SOM rule was triggered,
01:26then I think you would see the Fed act and start to cut.
01:29So I think they feel as though they're in a place now where they have a lot of options,
01:34they have a lot of tools at their disposal, and they can move in either direction depending upon the data.
01:41Now, you might ask the question, will the stock market be comfortable with this?
01:46And I think at the end of the day, the stock market has been quite resilient.
01:51But we have to assume that it will react more to data points because it knows the Fed is so dependent.
01:59So I would anticipate an environment of heightened volatility, more of an outsized reaction to data points.
02:07And it's not just the traditional data points.
02:10It's a variety of data points, including, for example, consumer inflation expectations.
02:14I think that's gone up a lot.
02:16I think it has the power to impact the Fed's thinking.
02:20And so markets could very well react to those prints as well.