Last week’s Consumer Price Index report for March made it very clear that money still drives markets.
Much of the financial market enthusiasm that erupted just prior to Halloween hinges on the theory that the Federal Reserve will bring the cost of money down in 2024. Initially, traders thought it would be a mere six months (March 2024) until cheaper money became available.
March 2024 has clearly come and gone, and now traders’ new hopes are pinned on cheaper money becoming available in September or, if they are lucky, in July.
Standing between traders and their obsession with cheaper money are some facts.
Congress has tasked the Federal Reserve with two sometimes opposing missions – price stability and maximum sustainable employment. Right now, the fact is that neither of these missions call for lower short-term interest rates.
No matter whether you use the Consumer Price Index (CPI) or the Federal Reserve’s preferred Personal Consumption Expenditure Index (PCE), inflation has stopped going down. The key difference is that the March CPI report showed 12-month inflation at 3.5% while the February PCE report showed 12-month inflation at 2.5% (March’s report will be released on April 26).
While the PCE inflation is certainly closer to the Federal Reserve’s target inflation rate of 2%, neither report reflects a compelling reason for the Federal Reserve to risk additional inflation by making money cheaper.
Unlike inflation, the Federal Reserve does not have a target employment or unemployment rate that reflects maximum sustainable employment. They state that “the maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market.”
March’s unemployment report fell right in the 3.7% to 3.9% range that has been in place since August 2023. Most economists theorize that full employment lies somewhere between 3% and 3.5%, so the unemployment data also lacks a compelling reason to make money cheaper.
Thus, our beloved traders are left waiting for the cheaper money that they thought would arrive last month. Their reaction to last week’s inflation report shows that their patience may be wearing a bit thin as they recalibrate their inflated expectations for “imminent” interest rate cuts by the Federal Reserve. These rate cuts are proving just as elusive as the “imminent” recession of 2022 that has not arrived (yet).
The coming weeks and months could prove a bit challenging to those who have become accustomed to their investment accounts persistently rising on a short-term basis. We are hoping the long-term perspective we persistently advocate will counteract these misplaced inflated expectations for perpetually rising markets.
Quote of the week: James Clear: “Ambition is when you close the gap between your circumstances and your expectations. Entitlement is when you expect others to close the gap between your circumstances and your expectations.”
Graphic Credit: iStock photo ID:1487316498 Credit: Sangwien