Powell turns Santa but questions remain over when the rate cut cycle will kick off, says this global market economist

Fed hints at rate cuts in 2024

As expected, the US Federal Reserve (the Fed) held interest rates steady for the third consecutive time in its December meeting. The decision comes amid the fastest string of rate increases in four decades, which pushed rates to their highest level in 22 years. But it’s the commentary on the future rate trajectory that’s stoked a smart rally across global markets. Chairperson Jerome Powell signalled three rate cuts for the coming year. Although the three-0.25 percent cuts are fewer than the five quarter-point cuts anticipated by financial markets and some economists, the change in tone was well received by the markets as the Dow surged to a fresh high, breezing past the 37,000 mark for the first time. Additionally, the dollar index cooled and 10-year US treasury yields slipped below the 4 percent mark.

In an interview to Moneycontrol, Peter Cardillo, Chief Market Economist at Spartan Capital Securities, said that in recent (Fed) meetings, the narrative had shifted from interest rate hikes to a forecast of rate reductions.

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``The focus now centres on tackling inflation, with Powell emphasising the ongoing efforts. While cautious about declaring victory, Powell's consistent messaging on favourable job market and inflation trends serve as a welcome `gift‘ to Wall Street, akin to a visit from Santa Claus,’’ said Cardillo.

Cardillo cautiously acknowledged the potential for a mild recession and speculated on the timing of rate cuts. While the market expected rate cuts by the end of the first quarter, he was sceptical, suggesting that it might happen later, possibly in the third quarter. Additionally, Cardillo highlighted the potential for more than three rate cuts in case of a severe recession, even reaching five or six.

Shifting focus to inflation, Cardillo notes that achieving the 2 percent inflation target might hinge on factors such as oil prices and wage inflation. He indicated the possibility of reaching the target sooner if oil prices remain low and wage inflation continues to moderate. However, Cardillo cautioned that achieving the 2 percent target might take more time than the market anticipates.

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Exploring the potential impact of the Fed's stance on emerging market central banks, Cardillo points out that as the Fed goes, so do other economies, and even G7 nations follow the Fed's lead. He predicts that emerging markets, particularly in Asia, would likely follow the Federal Reserve's actions, citing falling inflation in Europe and deflationary trends in Japan and China.

Regarding India, Cardillo acknowledged the positive momentum in the country's markets following the resolution of political uncertainties. Cardillo felt oil prices would not reach levels that would threaten inflation anytime soon.

Even as optimism over the Fed’s changed tack on rate cuts prevails, questions linger about the timing and extent of potential rate cuts and the achievement of inflation targets. As the global economic landscape continues to evolve, market participants will closely monitor the Fed’s actions and their repercussions on the global economy.

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