The problem is that no matter how rational expectations for rate cuts in 2024 may be (or at least sound), those expectations can feed irrational overshoots in asset prices. Indeed, the point of today’s gold move is that someone may have felt compelled to run the gold stack at the COMEX open, triggering a cascade of stops, but they were quickly given a reality check when the market turned unbought.
The market’s interpretation of Fed Governor Chris Waller’s comments may be overdone. The Federal Reserve is expected to take inflation risk management considerations into account and limit the aggressiveness of its easing actions. In other words, too many rate cuts are being priced in without the proof in the economic pudding.
After all, if the Fed were to ease, according to current market pricing, solely on the basis of inflation normalization without clear signals of recession, it could ease financial conditions substantially. This could increase the risk of an economic reacceleration, a scenario that the Fed may find unwelcome, especially if it leads to inflationary pressures.
Thus, the primary market debate revolves around whether the FOMC would adjust policy beyond insurance cuts if growth were to slow and inflation were to move closer to target over a sustained period.
