Those hoping for rate cuts in 2023 were severely disappointed by December’s FOMC Minutes released today. 📝
The notes from members showed little discussion about how much to raise rates at the February meeting. Instead, it focused on the need for flexibility and optionality in policy as inflation remains stubbornly high.
With that said, a new worry has emerged for the Fed.
Officials noted their concern that an “unwarranted easing in financial conditions” driven by the market’s perception that the Fed could loosen policy would further “complicate” their fight against inflation.
So what does that mean in English? 🤔
Recently the market has seen interest rates fall as participants began pricing in peak inflation and a looser approach from the Fed. However, the Fed says the data it’s looking at suggests inflation risks remain too elevated to begin adjusting their policy yet. But the market is doing its own thing. And if the market keeps rates subdued for a significant period, that will only make it harder for the Fed’s policies to have their desired effect on inflation.
In essence, the market positioning itself in anticipation of the Fed loosening its policy will only delay the Fed loosening its policy. 🤦
Jerome Powell has been clear on the Fed’s aggressive stance against inflation. For anyone paying attention, today’s “no rate cuts in 2023” messaging is nothing more than a reiteration of what we already knew. However, the market has yet to accept that rates will stay higher for longer; otherwise, they wouldn’t be pricing in rate cuts. So today’s messaging from the Fed is an attempt to talk rates back up where they want them to be. 🤷
We’ll have to see if this week’s December jobs data changes the broader inflation debate at all. But if today’s Job Openings and Labor Turnover Survey (JOLTS) is any indication, the labor market likely maintained its record strength last month.
And while we’re mentioning employment, it’s important to remember that certain pockets of the market continue to shed jobs. Particularly those who overexpanded during the pandemic or have weak overall business models. Salesforce cut 10% of its workforce today, and Vimeo laid off 11% of its employees. ✂️