Are rates going down?

The March FOMC committee starts today and will conclude tomorrow with the oficial decision on rates. No cuts are expected, which will prompt another tantrum from the President, that knows that the risk of a recession is increasing and the pressure on equity markets is mounting. But it’s not only that the Fed will not cut that worries the market. Take a look at the bottom part of the chart below: the probability of rates being higher than they are today has increased from less than 10% in February to around 35%, now. If that were to happen, the economy and the markets will feel it as they will need to readjust expectations. And that’s what happens when you have a clear dual mandate that does not include market well being. The Fed is focused on price stability and full employment. And it is designed to be reactive, not proactive. If the oil shock persists, and inflation ticks up, rates can go higher. Perhaps when Kevin Warsh joins the Fed as chair in May, things take another route, but a change in the mandate is not contemplated and will need Congressional approval. And the FOMC committee operates by consensus, although the Chairmnan has the last word, and can override the committees voice. But it’s uncommon and unlikely. If we want lower rates, Hormuz needs to reopen, which means the war in Iran needs to end. And it doesn’t look like that’s happening soon.

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