The Weekend Edition is pulled from the daily Stansberry Digest.
The Federal Reserve met in mid-March to report its latest policy statement and economic projections.
The major indexes moved higher once Fed Chair Jerome Powell started talking.
The benchmark S&P 500 Index and tech-heavy Nasdaq Composite Index closed up roughly 1%, and the small-cap Russell 2000 finished 2% higher. Gold and bitcoin prices rose, too... all while yields remained steady.
So what exactly did Powell say that made Mr. Market giddy?
First, as expected, the Fed kept its target federal-funds range between 5.25% and 5.5%, where it has been since last June.
Second, it signaled multiple rate cuts to come later this year.
And third, the bank said it would keep trimming its balance sheet, but less quickly than it has been for the past two years.
In his post-meeting press conference, Powell indicated for the first time that the central bank would "slow down" the pace of balance-sheet reduction "fairly soon," he said. "We want to avoid any kind of turbulence," he continued.
The idea is to avoid any potential troubles with the banking system... now that the central bank has chopped $1.5 trillion from its balance sheet since spring 2022.
It was a well-received mix...
In its quarterly projections, the Fed maintained an outlook for three 25-basis-point cuts to its suggested fed-funds rate later this year. It also projected inflation of 2.4%... GDP around 2% this year (higher than the 1.4% it projected in December)... and an unemployment rate at 4%, slightly lower than its last forecast.
I was weighing two possible outcomes going into the meeting. As I wrote in the Digest recently...
If we hear higher expectations for growth and inflation – and Fed interest rates – or any of the three, it could lead to a haircut for dollar-denominated assets. Alternatively, Fed numbers and a Powell press conference supporting the status quo could just keep the bullish theme going.
The Fed gave us the latter, and the market loved it.
The Fed's stance is that the pace of inflation is coming down enough... that the labor market isn't cratering... and that economic growth will continue to pick up – even before its promised rate cuts.
You could also look at the slowing balance-sheet reduction (with the option to put liquidity into areas that might need it) as a kind of stimulus without moving rates.
All in all, Mr. Market was happy with the news.
And of course, we can't ignore what's happening across the pond...
The European Central Bank ("ECB") wrapped up a policy meeting on the same day as the Fed.
First, ECB President Christine Lagarde suggested that the ECB could cut its bank-lending rate at its meeting in June.
Without explicitly saying it, she laid out the factors that the ECB string-pullers will weigh in the next few months. She mentioned inflation and wage growth, both of which have been slowing in Europe. As Lagarde said at a press conference in Frankfurt, Germany...
If these data reveal a sufficient degree of alignment between the path of underlying inflation and our projections, and assuming transmission remains strong, we will be able to move into the dialing back phase of our policy cycle and make policy less restrictive.
We haven't heard the words "less restrictive" uttered by a notable central-bank official in a while... Those can feel like magic words for many investors.
Eurozone inflation cooled to a reported 2.6% annual growth in February. That's still slightly higher than the consensus figure economists were expecting... as was the 3.1% growth in core inflation (which leaves out volatile sectors of energy and food prices).
The good news is, the inflation rate is trending down over the long term. The pace of inflation is well below its year-over-year peak above 10% in 2022.
Lagarde also left open the possibility that the ECB might not cut rates – or that it might make fewer cuts than some might think. (Investors are thinking three cuts "over there" as well.)
She said the ECB would make decisions "meeting by meeting." Its next meeting is in early April, followed by another in June.
Other ECB officials have suggested that timing the first rate cut with the central bank's next round of quarterly economic projections (in June) could be a good idea. The head of the Dutch central bank, Klaas Knot, recently told the media...
Personally, I penciled in June for a first rate cut. Where will we take it from there? We are data-dependent, so I would focus on those meetings in which we have the most data available, which are the meetings in which we have new projections, so September and December.
I'm willing to bet Lagarde and Powell have been talking with each other about the same idea. They do chat about these things (Powell has admitted so publicly in the past), and the Fed's next quarterly economic projections are also due out at its meeting in June.
Keep in mind, history suggests that the markets respond well to policy "pivots" toward incremental rate cuts. That's in contrast to the "emergency" cuts that we've gotten used to the past 20 years or so, which are associated with plunging markets.
Now, I'm still not saying what the Fed or ECB is saying is or will be "right"...
In fact, there's a pretty good chance that what they're projecting won't happen.
We have good reason to believe the inflation numbers will remain higher for longer... So we should expect interest rates to stay higher for longer, too.
But the market doesn't care what we think.
That's why we'll monitor what Lagarde, Powell, et al. are saying. Enough investors hang on to the central bankers' words that their statements move prices.
If nothing else, the narrative they sell provides an anchor for what financial conditions to expect in the months ahead and a backdrop for the market environment.
Before I sign off, let's switch gears and talk about an "anomaly" in the markets...
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Good investing,
Corey McLaughlin
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