Is the Fed Playing the Market’s Favorite DJ? Rate Cut Party Could Be Just Around the Corner

In the ever-twisting saga of the financial markets, whispers are growing louder that the Federal Reserve might just be gearing up to spin the wheels of fortune in favor of rate cuts, potentially igniting what we in the biz like to call an “everything rally.” That’s right, from the glitzy dance floors of stocks to the VIP lounges of high-yield debt, the party could be getting started.

The scene’s set with federal-funds futures prices, those crystal balls of the financial world, suggesting the Fed might start lowering its key policy rate, shaving off 25 basis points from a cool 5.25% to an even cooler 5.50%, as soon as next spring. And hold onto your hats, because the futures market, in a move that’s got eyebrows raising and tongues wagging, is pricing in up to six quarter-point cuts by the grand finale of 2024, according to the CME FedWatch site.

Rewind a couple of months, and the narrative was all about the tightening of financial conditions. Think of it as the Fed playing hard to get, with bond yields and the dollar playing tag while the stock market sulked in the corner. Fast forward to now, and it’s like the market’s had a shot of espresso, with bond yields and the dollar taking a breather, and stocks getting their groove back, all on the beat of expectations that the Fed’s hikes are so last season and cuts are the new black.

Fed governor Christopher Waller, the man with his finger on the pulse, hinted last week that inflation might be taking a chill pill, easing back toward the Fed’s cozy 2% target. If this cool-down continues, Waller suggests the Fed could start cutting rates without the unemployment rate even getting a chance to jump on the bandwagon.

Meanwhile, investors, ever the opportunists, are diving into the pool of high-yield bond funds, domestic growth, and small-cap funds like there’s no tomorrow. Bank of America’s strategy team, led by the savvy Michael Hartnett, points out that even Cathie Wood’s ARK Innovation ETF is getting a slice of the action, shadowing the fate of Austria’s century-old bond in a dance of interest rate dependency.

But, dear readers, the main event is yet to come. The November employment report, dropping this Friday, is set to be the showstopper, a real economic eye-opener for the Federal Open Market Committee before their December huddle. Economists are betting on a 200,000 rise in nonfarm payrolls, with NatWest analysts even throwing a 240,000 number into the ring, thanks to some returning workers from strike.

Back in September, the FOMC’s crystal ball only foresaw a modest two 25-basis-point trims in 2024. But oh, how the tables have turned! The markets, in a hopeful trance, are now dreaming of at least four, maybe even six rate reductions. The big question on everyone’s mind: Will the Fed’s policy-setting panel turn these dreams into reality, or is the market dancing to its own tune? Stay tuned, as the market waits with bated breath to see if the Fed will hit play on the rate cut remix.