When it comes to cuts in interest rates, investors stubbornly cling to the notion that "no" means "yes".
In the movie, Dumb and Dumber, Lloyd Christmas (Jim Carrey) asks the lovely lady he is pursuing what the odds are that the two of them might get together; and makes a point of telling her to "give it to me straight". She replies, "not good". She further clarifies that the actual odds are "more like one in a million". Not to be deterred, Carrey, in character, replies "So you're telling me there's a chance". Here is the clip https://www.youtube.com/shorts/cbrTKw50X6U
I am not suggesting that rate cuts are a million-to-one shot. What I am saying is that investors are so fixated on their own desires, they refuse to consider the possibility that they might be wrong. That have become increasingly obsessive and dependent on the fulfillment of their own expectations and wishes.
At the conclusion of the FOMC's latest meeting, Fed Chair Jerome Powell held the customary news conference. During his remarks, he said:
"We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate for as long as appropriate."
Key phrases in the statement above are the data have not given us that greater confidence and gaining such greater confidence will take longer than previously expected. Then, in reiterating what he has said on several occasions over the past two years, the chairman confirmed that which should be given more attention by investors: We are prepared to maintain the current target range for the federal funds rate for as long as appropriate.
Nothing was said which indicates the timeline for a change in direction for interest rates has shortened. Quite to the contrary, the Fed seems to be indicating just the opposite.
In true "Lloyd Christmas" fashion, investors jumped in the swamp headfirst, seemingly clueless to unseen risks in the murky depths. With the announcement today of a "slowdown in U.S. jobs", investors bought stocks and bonds aggressively with renewed hope and determination that the Fed would cut rates this year.
At the end of the movie, Lloyd Christmas (Jim Carrey), although having bumbled his way to hero status, does not get the girl he is pursuing. It is possible that investors might not get the gift they so relentlessly desire and pursue. Rather, they are more likely to get shocked unmercifully. If so, it is because they are not listening.
QUESTIONS FOR INVESTORS
- How high can the markets go based on the hope that interest rates will eventually move lower?
- If/when there is a change in direction for interest rates, how much of the increase in market values already discounts that action?
- Are you listening; or are you just hearing what you want to hear?
(also see Investors Are Too Anxious for Rate Cuts)
Kelsey Williams
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!