The Fed's Tightrope for the Rest of 2024
Can Powell Tap Dance to a Soft Landing in 2024's Final Act?
So the opening salvo has been fired. Whether it reignites risk-on festivities or washes markets back into recessionary doubt remains to be seen. Jerome Powell's firefighting crew have talked the talk on regaining control over inflation without crushing economic expansion. Now comes the real tightrope act delivering in the year's final months.
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First Easing Restores Policy Flexibility
By uncorking its first rate cut since the pandemic chaos while retaining maximum flexibility on the easing path forward, the Fed has bought itself a bit of breathing room and market credibility. No longer is it stuck on an auto-pilot path of ever-higher interest rates despite banking stress and declining price pressures.
The Choreography Begins - Dosage is Critical
Now the real choreography begins. How aggressively can Powell and Co. lean into conventional dovish policy support as financial conditions loosen? Or will an upside inflation surprise necessitate intermittent policy re-tightening that roils markets and sets back the soft landing timeline?
Getting this dosage right is critical, with recession risk at its highest level since the Great Financial Crisis. The latest dot plot signaled another 50 basis points of easing over the final two meetings in 2024. But Fed commentary around that projection struck a distinctly non-committal tone compared to previous guidance.
Brace for More Two-Way Volatility
Take that as a clear signal the Fed is reserving maximum optionality to lean hawkish or dovish as backward data evolves. In other words, buckle up for more two-way volatility as markets ping-pong between mixed policy messaging and sputtering macroeconomic indicators.
Two Potential Paths...For Now
Bulls are betting that the steep inversion already baked into the Treasury curve is flagging an imminent downturn that prompts the Fed to stay in easy money mode. In that optimistic take, 2024's final chapters see borrowing rates retreat decisively as expansion downshifts to a below-trend cruising speed.
Conversely, growth's death grip on inflation forces Powell's hand back toward policy restrictiveness. That could not only crush the flickering embers of a stock market rally, but validate recessionary base-case fears unseen since the great pandemic unwind.
Final Act Will be One for the Books
Whether the Fed's choreography dazzles in the final 2024 act or stumbles under the unpredictable spotlight will be one for the history books. Buckle up – the toughest dance moves are now on deck.
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