Fed is walking 'a very dangerous line' with inflation
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Federal Reserve officials have begun tempering expectations for interest rate cuts, with some even stating that there is currently no reason to adjust rates. As markets had anticipated three rate cuts in the latter half of the year, Verdence Capital Advisors Chief Investment Officer Megan Horneman joins the Morning Brief to discuss why markets (^DJI, ^IXIC, ^GSPC) need to recalibrate their expectations.
Horneman states that the market seems to be adopting "a more realistic" stance regarding what the Fed can accomplish in 2024. She notes that a rate cut in March or June was "way too optimistic," saying she had always believed any cuts would be "a second-half-of-the-year story." With "new interest rate expectation[s]" emerging, Horneman says that markets are now beginning to "reset" to align with these revised expectations.
Horneman expresses concerns, particularly within the labor market and the potential impacts of inflation, emphasizing that persistent wage growth continues to pose "a problem for the Fed."
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Horneman attributes part of the economy's resilience to "[Fed Chair] Jerome Powell adopting such a dovish stance at the end of last year." She believes this fueled a resurgence in economic activity, cautioning that this could lead to a resurgence in inflation, making it "a very dangerous line they're walking."
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Editor's note: This article was written by Angel Smith
Video Transcript
SEANA SMITH: --because futures once again pointing lower this morning. Looks like we're going to see losses at the open. Now, this move to the downside coming after several Fed officials struck a hawkish tone this week. Just this morning Atlanta Fed President Raphael Bostic saying that he only sees one rate cut in the fourth quarter this year. This coming after San Francisco Fed President Mary Daly saying, quote, "the labor market is still going strong and growth is going strong, so there's really no urgency to adjust the rate." Cleveland Fed President Loretta Mester also weighing in and echoing a similar stance to what we just heard from Daly, saying that she still sees rate cuts this year, but reiterated once again that the Fed isn't in a rush.
So let's a sense of what this means for you, the investor out there. We want to bring in Megan Horneman, Verdence Capital Advisors' Chief Investment Officer. Megan, it's great to see you again. So how are you looking at the moves, this downward move that we've seen in the market over the last few days and what that signals could be ahead here for investors?