The stock market shot up. Global bond markets rallied. Wall Street thought Christmas had come early this year after Fed policymakers forecasted three rate cuts in 2024. It wasn’t long before someone poured cold water on that notion: “We aren’t really talking about rate cuts right now,” New York Fed President John Williams said on Friday. Monetary policy is often a mind game for markets and politicians alike. How central banks communicate a policy is sometimes more consequential for a bond trader or a politician seeking reelection than the policy itself. And right now, on the eve of an election year, the Fed is grappling with how to broadcast a potential end to a bruising interest rate hiking campaign meant to bring down inflation. “This is a particularly difficult time, signaling that you’re probably at the end of a tightening cycle,” said Ellen Meade, a former Fed senior adviser who was closely involved in messaging monetary policy. “The tactics around communication are tough.” To most economists, the 0.75 percentage point rate cut that Fed officials alluded to last week wasn’t a sign of a dramatic slowing of the economy. As Fed Governor Christopher Waller mentioned in a speech in late November, cuts may be necessary to adjust rates back to “neutral” as inflation comes down. It’s true the economy has slowed, but most would agree it’s on solid ground going into next year. Fed Chair Jerome Powell’s lean into potential cuts (a pivot from his more hawkish stance a few weeks ago) may have been an attempt to communicate that there was a fulsome discussion during the Fed’s meeting of how to exit a cycle of raising rates, Meade said. It would have been inappropriate for Powell not to acknowledge the possibility of rate cuts if the Fed’s meeting minutes, to be released three weeks from now, revealed it was part of the discussion. The strategy for communicating lower rates will largely depend on the data. And with uncertainty reigning supreme, it’s still anyone’s guess. For some, the potential for easing monetary policy may have raised some worry over the future path of the economy given a cooling labor market and soft spots in manufacturing and other sectors. For now, most Fed watchers say there is enough evidence for the central bank to communicate a more deliberate stance on ending rate hikes. Powell admitted that Fed policymakers were “aware of the risk that we would hang on too long” when it came to raising rates, potentially sending the economy into a nosedive. “They’re trying to engineer cruising at a lower altitude without landing at all,” said Diane Swonk, chief economist for KPMG. She added: “Why risk a recession if we don’t need it?” Happy Monday — Heading to the World Economic Forum and want to chat with MM? Send a note to Zach at zwarmbrodt@politico.com. He'll be on the ground in Davos.
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