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Fed Runs Open Mouth Operations: Rate Cuts Coming! But Not Yet

February 1, 2024

The Federal Reserve didn’t do anything at all at the January Federal Open Market Committee (FOMC) meeting. But Jerome Powell aggressively ran “open-mouth operations” trying to dampen market expectations for a rate cut at the March meeting.

Nevertheless, one thing is clear: interest rate cuts are on the horizon.

Just not yet.

The FOMC left the federal funds rate unchanged in a range between 5.25 and 5.5 percent. That was the only actual policy announcement coming out of the meeting.

Everything else was just talk.

But Fed-talk – open-mouth operations – moves markets just as forcefully as concrete policy changes – sometimes even more so. The central bankers at the Fed use messaging as a policy tool.

That’s what Wednesday was all about. Powell and Company released enough hawks to slow the market’s roll but let just enough doves fly to prevent a market meltdown.

The Fed Is Finished Hiking Interest Rates

The first message out of the FOMC meeting was rate hikes are over. The committee made that clear by removing language from its official statement.

For months, the FOMC statement has included a phrase asserting “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account…”

In the latest statement, the committee removed all mention of “additional policy firming.” Instead, the statement reads, “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data.”

This clearly signals that the next move on rate cuts will be down.

During the post-meeting news conference, Federal Reserve Chairman Jerome Powell confirmed that the central bank has likely reached the peak of this hiking cycle.

We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.

We Want Our Interest Rate Cuts!

The stock market has soared over the last few months, hitting record highs in anticipation of a return to the easy money everybody loves and desires. Most people believed cutting would begin in March.

Easy money is the mother’s milk of this debt-riddled economy. The Federal Reserve spent more than a decade holding interest rates artificially low and pumping liquidity into the economy. That incentivized borrowing, and today, everybody from the federal government to American consumers is buried to their eyeballs in debt.

Debt and high interest rates don’t mix and that’s why everybody yearns for rate cuts – sooner rather than later.

Powell threw cold water on those hopes and dreams, going out of his way to talk down expectations for cuts at the March meeting. While the FOMC made it clear those cuts remain on the table, the messaging was “not yet” and was clearly intended to dampen market enthusiasm.

That’s likely because every member of the FOMC knows that inflation isn’t dead and buried. No matter how you slice the most recent CPI data, it remains well above the mythical 2 percent target. Powell even said so out loud.

Inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain.

Powell emphasized the committee may need additional signs that inflation is easing before it begins “dialing back the restrictive level” and cutting rates.

Interestingly, according to the Chicago Fed National Financial Conditions Index (NFCI), monetary policy is not at a “restrictive level” at all. The NFCI came in at –0.56 in the week ending January 26. A negative number indicates a historically loose monetary policy.

The central bankers at the Fed have to know this, don’t they? I suspect it’s likely part of the reason they are trying to hold rates at this level just a little longer. Despite all the rhetoric, they know in their heart of hearts that this was a half-hearted inflation fight.

Powell emphatically tried to snuff out hope that interest rates would start coming down in March, saying cuts at the next meeting are “probably not the most likely case or what we would call the base case.”

Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do that. But that’s to be seen.

Powell went on to say that “the median participant wrote down three rate cuts this year.”

But I think to get to that place where we feel comfortable starting the process, we need some confirmation that inflation is in fact coming down sustainably to 2 percent.

Powell leaned heavily into the “data dependent” mantra.

We want to see more good data. It’s not that we’re looking for better data, we’re looking for a continuation of the good data we’ve been seeing.

The emphasis on “data” gives the Fed an out to do pretty much anything at the next meeting. The FOMC could conceivably point to some big change in “data” and cut or even raise rates at in March and plausibly say, “We told you this was a possibility.”

Market Reaction to Federal Reserve Messaging

The markets did exactly what one would expect in light of the hawkish rhetoric.

They tanked.

All of the major stock indices fell significantly on Wednesday after the FOMC meeting and Powell’s press conference. The Dow Jones dropped 318 points, a 0.8 percent decline. The S&P 500 fell 1.6 percent. Meanwhile, the NASDAQ being most hungry for easy money and speculation tumbled by 2.2 percent.

The dollar strengthened and gold fell modestly after the meeting.

This has been the typical knee-jerk market reaction to any hawkish rhetoric from the Fed or good economic news that might lead to more hawkish rhetoric from the Fed over the last year.

It reveals just how much they depend on monetary policy. The hope for a return to the easy money policies of the past almost entirely drove the recent stock market boom.

In other words, the markets want inflation.

It’s important to remember that a pivot back to rate cuts -- whenever that happens -- means a return to the very policies that caused price inflation to begin with.

In other words, any “victory” over inflation that involves a return to easy money really means a surrender to inflation. Easy money policies are inflationary. That’s what the markets are begging for.

And make no mistake; they'll get their easy money.

Here’s the reality: rate cuts and more inflation are hurtling down the tracks. It’s just a matter of time. When something breaks in the economy – and something will break in this debt-riddled economy with interest rates at 5.5 percent – the Fed will be forced to cut. And we’re not talking small cuts here. We’re talking about interest rates going back to zero and more quantitative easing.

That's what the Fed does during an economic crisis.

It’s not so much that the Fed is in danger of breaking the economy with higher interest rates today. The Fed broke the economy more than a decade ago when it pushed rates artificially low and left them there for years. This incentivized debt and malinvestments. It’s only a matter of time before the house of cards falls down.

The markets know this. That’s why they’re clamoring for rate cuts.

But the Fed is stuck between a rock and a hard place. It knows that higher rates will eventually cause the economy to collapse. It also knows that inflation hasn’t been beat. So, it faces a choice: higher inflation or an economic crisis.

Or perhaps both.

The central bank is trying to walk a tightrope high over Wall Street with no safety net.

As financial analyst Jim Grant put it, Powell and other Fed officials seem to look in the mirror and see themselves as Captain Chesley Burnett "Sully" Sullenberger who managed to land a crippled U.S. Airways jet on the Hudson River. 

The Fed has arrogated to itself the role of central planning agency. … It’s going to try to balance economic growth with the stability and integrity of the currency. How do they do that? I don’t think it’s given to mortal man and woman to do these things.

After all, Powell is no Sully.


Mike Maharrey is a journalist and market analyst for with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.

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