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This week, silence has been golden. And for US central bankers, it’s mandated too.
After a wave of hawkish Fedspeak, pooh-poohing the idea that the start of a rate-cutting cycle was upon us, Fed officials crept into their quiet period in anticipation of another consequential policy meeting, the first of the year, and perhaps the last for current interest rates.
Is it a coincidence that an abruptly hushed Fed arrived alongside a market uproar of all-time highs?
This week’s muscular GDP release provided the latest jolt of economic data to bolster the case for a “soft landing.” Market-accelerating rate cuts are coming even as a strong economy is already here. What else is left to say?
Of course, setting expectations is part of the Fed’s job, if not an explicit part of its mandate. And the cautious remarks that served to pump the brakes on an imminent easing cycle can be seen as yet another tool in the central bankers’ arsenal of perception-bending. Even as an unlikely batch of just-right economic data continues to roll, it doesn’t serve the Fed to telegraph its next move and front-run ahead of a cut. Touting a conservative outlook has done its job.
As labor markets are more balanced and inflation has moderated, central bankers are pleased with the overall picture of the economy, which analysts with Bank of America Global Research highlighted in a note earlier this week.
“We continue to expect the first rate cut in March, though we expect no strong signal in January,” they said. “The Fed needs to buy time to see more data.”
That’s the famous data-driven approach that has guided Chair Powell through the COVID era. But it’s one that has also drawn its critics as the Fed waits for the next series of backward-looking data to make forward-oriented decisions, leaving the market to parse an array of confounding signals.
Friday will bring the release of the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index. That will give Powell one last snapshot of data before the January policy meeting and help steer his thinking for the March huddle.
Traders are now pricing in a 47% chance that central bankers will lower rates at the meeting in March. That’s down from about 56% a week ago, and a long way down from last month’s 88%, underscoring how sensitive market observers are to the Fed’s vocalized wariness. Investors now expect the first cut to arrive in May.
But the cuts will come. And with hawks a little quieter for the moment and the Fed biding its time, the market commotion rings loudly.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.
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