Applying Yogi Berra's Wisdom To Unlock The Fed's Playbook
February 5, 2024
By Matthew Andera
Securities AnalystLast week, the Federal Open Markets Committee (FOMC) convened for the first time in 2024. At these meetings, the Federal Reserve analyzes economic conditions and dictates the federal funds rate – or the rate at which depositories lend their balances at the Federal Reserve to each other. In turn, this influences other short-term rates, such as the interest rate at which consumers lend or borrow. This closely watched monetary policy is what the Fed uses to help expand or contract the economy to reach their desired target of inflation. With Major League Baseball spring training just around the corner, I thought it would be appropriate to have Hall of Famer and Yankee great Yogi Berra help examine the Fed statement. Let’s take a swing at understanding their rate decision and the market’s reaction using his popular “Yogi-isms” – quotes that often sound illogical but can offer bits of wisdom.
"You can observe a lot just by watching."
At the press conference following the December FOMC meeting, Fed Chairman Jerome Powell had a much more dovish tone compared to previous appearances. While the Fed held rates steady at a range of 5.25-5.5%, Chairman Powell’s language signaled that we were likely at the peak of rate hikes and rate cuts were something that “begins to come into view” and “clearly is a topic of discussion.” This pivot from the previous stance helped markets close out the year on a high note. Bolstered by strong economic data and Powell’s remarks, markets rallied and began pricing in the likelihood of a rate cut at the March FOMC meeting to 90% as of December 27th.
"The future ain't what it used to be."
As we rounded base into the new year, we were met with continued strong economic data. Two weeks ago, fourth quarter GDP came in at 3.3% blowing past estimates of 2%. Next, Core Personal Consumption Expenditures came in at an annualized rate of 2.9% for December, indicating that the Fed has been effective in reducing inflation toward its target of 2%. Despite the contractionary policy, the labor market and economy remained strong. As a result, the FOMC left rates unchanged for the fourth consecutive meeting last Wednesday and Chairman Powell hinted there was little possibility of a rate cut at the next meeting in March. Markets are now pricing in the likelihood of a March rate cut at less than 35%.
"It ain't over 'til it's over."
Powell made it abundantly clear that the Fed has no interest in cutting rates too soon and risking the possibility that inflation could flare up again as we saw in the 1970’s. Markets are now pricing in a 97% chance of a rate cut at the May FOMC meeting, but so far we’ve seen these predictions swing and miss. While it is expected that economic expansion (GDP) is likely to slow in 2024 and inflation will continue to dampen, the Fed will wait for the appropriate signs before attempting to steal home.
"When you come to a fork in the road, take it."
Markets have been volatile in periods surrounding the Fed decision, but investment opportunities remain. As rate cut expectations continue to be pushed out, now is a perfect time to put cash to work and lock in current interest rates. And while equity market indices are hovering near all-time highs, performance is relatively concentrated, leaving ample opportunity in other areas of the market.
"You've got to be very careful if you don't know where you're going, because you might not get there."
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