The interpretation of Fed governor Waller's comments may be excessive
The problem is that no matter how rational expectations for rate cuts in 2024 might be (or at least might sound), those expectations can feed irrational overshoots in asset prices. The point, in fact, is today's bullion move that someone may have felt compelled to run the Gold stack at the COMEX open, triggering a cascade of stops, but they were quickly given a reality check when the market turned offered without a bid.
The interpretation of Fed governor Chris Waller's comments by the markets may be excessive. The Federal Reserve is expected to make considerations related to inflation risk management, limiting the aggressiveness of its easing actions. Put another way, too many rate cuts are priced in without the corresponding proof in the economic data pudding.
After all, It could substantially ease financial conditions if the Fed were to ease according to the current market pricing solely due to inflation normalization without clear signals of a recession. This might elevate the risk of an economic reacceleration, a scenario the Fed might view as unwelcome, particularly if it leads to inflationary pressures.
Hence, the primary market debate revolves around whether the FOMC would adjust policy beyond insurance cuts if growth slows and inflation moves closer to the target for a sustained period.
Author
Stephen Innes
SPI Asset Management
With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.
