Fed Members Fan Out to Douse Raging Rate-Cut Fires

So far, vice chair Williams, Mester, Bostic twice already, and even Goolsbee who accused markets of wishful thinking.

All heck re-broke loose in the markets last Wednesday after the Fed announced that it would keep its five interest rates steady, with the top at 5.5%, and with the “dot plot” in its Summary of Economic Projections (SEP) showing that 11 of the 19 participants expected three or more rate cuts in 2024 while 8 expected between zero and two cuts, which put the median therefore at three rate cuts in 2024. But trading in the options market implies six rate cuts in 2024 – double the median projections.

Alas, for most of 2022, the dot plot projected rate cuts in 2023; and then in the December 2022 dot plot, those rate cuts in 2023 vanished.

The Powell-was-dovish meme started in May 2022 and swamped the internet after every single FOMC meeting, no matter what Powell actually said. Markets have been betting on rate cuts ever since the Fed started hiking rates. And those Powel-was-dovish memes and rate-cut bets were followed up by subsequent rate hikes all the way to 5.5%, and markets have been wrong with their rate-cut bets in 2022 and 2023, so that’s nothing new.

What’s new is the magnitude of the fires that ensued in the markets, and so Fed members fanned out to douse those fires, starting with Fed Vice Chair John Williams on Friday with his line, “We aren’t really talking about rate cuts right now.”

Today, it was the turn of Chicago Fed president Austan Goolsbee, who said in an interview on CNBC that he was “confused” about the markets’ interpretation of Powell’s remarks last Wednesday, that those interpretations were essentially wishful thinking.

When he was asked what the Fed did on Wednesday, and what the change of policy was, he said: “We voted not to raise rates,” he said. “Policy change was, No Change. We kept rates where they were.”

“The data on inflation is the key thing that we missed in our mandate, and the key thing that should drive our decision making is on inflation,” he said. We have seen significant improvement on the inflation front, bringing us back closer it looks like to our target. And that’s reflected in the SEP dots.”

When he was asked if there was still a bias to hike after the word “any” was added to the statement (“In determining the extent of any additional policy firming…”), Goolsbee said:

“If we get improvement on inflation, that we’re clearly moving to target – and we’re still not there yet, we still need to see these markers – if we get inflation back into the range of our dual-mandate goals, then we’ve got more symmetric concerns, let’s call it, about both sides of the dual mandate,” he said…..

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