Fed Holds Policy Rate At 22-Year High – That’s The Good News

As expected, the US Fed did not hike yesterday and held its policy rate at a 22-year-high while signalling rate cuts to start in 2024. Asset markets are jubilant across the board.

Relief rallies are typical at the end of central bank hiking cycles. Optimism makes sense for government bonds, which become more valuable as rates fall and risk aversion rises. But for equity and commodity markets, this is where good news ends.

Central banks stop hiking rates when inflation falls and the economy starts showing stress from the prior tightening cycle. That’s happening now. They begin slashing rates as conditions deteriorate further.

Unemployment spikes during the cutting cycle as revenues tumble, debt defaults rise, and companies move to reduce overhead. As unemployment increases, demand weakens further, profits disappoint, and stock markets dump.

Wall Street is celebrating that central banks foresee economic weakness to prompt rate cuts in 2024. At the same time, they are optimistic about stocks priced at high multiples of double-digit earnings expectations. These assumptions are incongruent.

Disclosure: No positions

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