Wall Street Dialogues

Journalist: The FED ended its two-day meeting. Interest rates remain the same and the dot map suggests three cuts throughout the year. There were no changes. And yet, the stock market broke its highs. The S&P 500 index crossed 5,200 points. The Dow Jones Industrial and the Nasdaq are pointing in the same direction and with similar enthusiasm. What happened?

Gordon Gekko: No news is good news.

Q.: The FED is data dependent but the inflation of January and February, which climbed a notch in all measurements, did not move the ammeter for Powell and his people. Are they no longer so dependent on data?

GG: That’s the good news. Maybe it’s a jolt, Powell said. Or something more important. “We do not know”.

P.: And they don’t care either.

GG: The thing is that monetary policy, as tuned, is restrictive and has room to address both scenarios.

Q: The markets were prepared for a less friendly reaction.

GG: As it is. But the FED, deep down, thinks that the numbers (even seasonally adjusted) reflect a seasonal distortion and not a change in trend. They don’t know for sure, but they suspect it. And they are pleased, yes, with their decision to see and wait, which has been the official policy since July.

Q.: Instruction that is not modified. Although Powell insists that the data will guide them in making decisions.

GG: The FED wants to lower rates in 2024. That is clear. The inflation figures for January and February, by the way, do not give you the footing or confidence to begin the task. This is a personal opinion: Powell was more urged to start pruning last December 13, when he “pivoted,” than he is now.

Q: And why do you think this is so?

GG: Not because of the pace of inflation. Yes, due to the solidity of economic activity, which the FED corrected upwards in its projections. If you look at the points map, the median of the opinions confirms, as before, the willingness to make three quarter-point reductions this year. But there were five opinions that favored more cuts, and now there is only one left.

Q: It’s an interesting point. Would you say that it is not so much the fate of inflation as the risk of a recession that may push the FED to swing the ax and bring down rates?

GG: If the FED anticipated a recession, the rate cut would have already begun. In December, there were hints of a rapidly weakening economy, and hence the inclination to propose more rate cuts. And also the rush of the markets to imagine it as soon as March.

Q: The thing about the fragile economy was a false alarm.

GG: Correct. And everyone, FED officials and the markets, now exhibit a more aligned vision. That is, three or two rate cuts. They could start in June, but if everything continues as it is, they could take longer. If the unemployment rate rises in the coming months as it did in the last measurements, the rate reduction will come sooner. As a preventive measure.

Q: What happened with the QT, with the pace of balance sheet reduction?

GG: It was discussed, there was no agreement to make a decision, but, Powell said, it will begin to slow down “fairly soon.”

Q.: Does it have anything to do with countering inflation?

GG: Nothing to see. The instrument used by the FED is the interest rate level. What you want to avoid with a slower QT are possible turbulence “a la 2019” in a scenario where the system’s excess liquidity decreased sharply. Do you remember 2019? The FED lowered the rate to 2% and the repo rate shot up to 10%. It shouldn’t happen again.

Q: What can be said about the resolution of the Bank of Japan? The rate increase completely closed the cycle of negative rates in the world. And what happened? Did the bonds not take notice? Didn’t anything collapse?

GG: Two years ago it would have been a catastrophe. Today it is irrelevant. Or not. The Nikkei rose, which has just recovered the old nominal records of 1989, and which confirms in its own way that better winds are blowing in Japan.