If the Fed doesn’t hike again, we likely have a mild recession (“soft landing”). If they do hike again, the probability grows significantly/exponentially that the landing is a lot less soft = more likely hard. If the latter occurs, I think the Fed needs to CUT rates sooner rather than later in 2024 (similar to the about-face Fed chair Powell performed in late 2018/early 2019). Such a reversal will not be well-received approaching the 2024 election season, but we’ll know afterwards for sure.
What is the market currently pricing in for Fed actions for the remainder of 2023?
90% probability that the Fed does NOTHING at their November meeting – “extended pause”
67% probability that they DO NOT hike at their December meeting – “extended pause II”
The Fed has shrunk their balance sheet via the sale of about $1.3 trillion long dated UST over the past year. Such supply has put technical pressure on the long-end of the yield curve – also tightening already tight financial conditions even more. We may have likely seen the last of the Fed hikes, but we may have to see a reversal in the Fed’s quantitative tightening policy (QT) before we see a 2024 Fed rate cut. Such would be consistent with our thinking that this cycle isn’t like any other cycle. QT might need to stop first and then a Fed funds rate cut as we experience a mild recession in 2024.
Big Powell speech this Thursday. Expect more of the same stuff from him: lots of tough talk about “higher for longer” rate policy, but I think that’s just talk and not reality. Everything is politics – including being the Federal Reserve chair.
Source: JonesTrading LLC as of October 17, 2023
Richard Barrett
Chief Investment Officer
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