“The danger of moving too soon is that the job’s not quite done”, Federal Reserve (Fed) Chairman Jerome Powell told 60-Minutes last month. He then advised that the Fed would not cut interest rates in March.
Powell followed that up with testimony before Congress last week. He reiterated his position that it’s too soon to talk about cutting rates… and he refused to commit to a timetable for doing so.
This matches up with what I suggested in these pages back in December – the market’s expectations of aggressive rate cuts in 2024 were misguided.
It all stemmed from a misunderstanding around the Federal Open Market Committee’s (FOMC’s) Q4 2023 “dot plot” – which showed that FOMC members projected three rate cuts this year with the first in March.
The FOMC is composed of 12 members. It includes the Fed Chair, the Board of Governors, President of the New York Fed, and four of the other regional Fed presidents.
The FOMC is technically the Fed’s inner sanctum. It meets eight times a year to discuss monetary policy.
And the dot plot is a chart that summarizes the FOMC’s collective expectations for interest rates over time. The market sees it as representative of the Fed’s insider discussions. But that’s not necessarily the case…
Each dot on the chart represents an individual FOMC member’s projection for the Federal Funds Rate over time looking forward. That’s all it is.
Each member gets to contribute their own dot. That includes the Fed Chair. Powell gets one dot – same as the other members.
To analyze the dot plot’s projections, we need to know who is sitting in on those FOMC meetings and placing their dots. And it turns out that four doves favoring rate cuts had just been placed on the FOMC ahead of last quarter’s plot. They replaced four sitting members – two of whom were hawks who favored rate hikes and two were moderates.
So the final dot plot that published was not at all representative of the Fed’s internal discussions. It was the four new members projecting their own bias onto the graph.
And here’s the thing – the dot plot has no bearing on monetary policy.
That’s all Jerome Powell… and he’s been very clear on his position. Rates will stay “higher for longer”.
It’s just that people don’t want to take Powell at his word. Many analysts are trying to project their own thoughts onto the matter instead.
For example, Vice Chair of Evercore ISI Krishna Guha had this to say after Powell’s testimony last week: “We think by June it will be clear that inflation is converging durably on 2% and the Fed can start cutting then.”
This matches the market’s expectations as well. Currently the market is pricing in rate cuts to begin in June.
But the Fed Chair hasn’t said one word about his timeline. In fact, Powell said he’s still not convinced it’s prudent to begin cutting rates.
So everything continues to match up with the thesis I’ve presented in these pages and in my book Beyond the Nest Egg.
I believe Powell is intent on maintaining a policy of normalized interest rates. And he’s doing so because he knows that we will destroy our economy, our financial system, and indeed our society if we continue down the path of cheap money with zero-bound rates.
To be clear, that doesn’t mean the Fed won’t cut rates this year. It likely will.
But those rate cuts will come later in the year. And they will be relatively small. Powell didn’t raise rates at the fastest pace in history just to chop them right back down to where they were.
If I’m right about this, things are about to get very interesting on Capitol Hill.
The data shows that 31% of the US government’s outstanding debt is maturing by the end of this year. That’s nearly $7.6 trillion worth of bonds coming due.
Obviously the Treasury can’t afford to pay that debt back. It’s going to run a deficit of nearly $2 trillion this year.
So the only way they’ll be able to satisfy the maturing debt is to roll it over into new bonds. The Treasury will have to issue new bonds to pay off the old ones.
But there’s a big problem here.
The average interest rate across all outstanding Treasury bonds is around 3.8%. And some of the bonds maturing may carry a rate substantially lower than that.
Yet current Treasuries yield between 4.14% and 5.75%, depending on the duration.
So if the Fed doesn’t proceed with large rate cuts, the Treasury will have to issue new debt at materially higher interest rates. And that means the US government’s annual interest expense will increase dramatically.
As the interest expense rises, it will necessarily eat into other areas of federal spending. And then Congress could be forced to actually reduce spending for the first time in over a century.
Of course our entire political system is set up to fight vehemently against any proposed spending cuts. And they’ve got away with it because the Fed has been willing to monetize government debt.
But what if Jerome Powell is serious about this fiscal responsibility thing? And what if his Fed refuses to buy Treasuries to support excessive spending in Washington?
That would be a show worth watching…
-Joe Withrow