April 16, 2024

QuickTakes

Hawks Fly Higher

For Longer Than Doves

It's official: Fed Chair Jerome Powell confirmed today that he and his colleagues aren't convinced that inflation is coming down fast enough to consider cutting the federal funds rate (FFR) any time soon: "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence," Powell said at a moderated question-and-answer session in Washington.

At the start of the year, market participants expected several cuts in the FFR this year based on the observation that once the Fed has stopped raising it, the rate was cut quickly or after a short pause in the past (chart). We've observed that in the past, the Fed cut rates in response to major financial crises, which haven't occurred so far.

Today, the 2-year Treasury note yield closed at 4.97%, while the 10-year yield rose to 4.67% (chart). The latter is likely to meet the former at 5.00% shortly. That level might mark the peaks in both for a while as long as a resumption in rate hikes is a remote possibility, as suggested by Powell today.

This development supports our higher-for-longer interest rate outlook. It also supports our view that the S&P 500 might have reached a short-term top at the end of March (chart). We note that the S&P 500 equal-weighted index has dropped below its early 2022 peak in recent days.

In economic news today, the March report on housing starts was weak, but March industrial production was strong (chart). As a result, the Atlanta Fed’s GDPNow tracking model showed real GDP for Q1 up 2.9% (saar), upwardly revised from 2.8%.

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