Moneybeat: Powell promises rates cuts in 2024

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Alright, it's time to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he joins us now. David, good morning.

DAVID BAHNSEN. GUEST: Well, good morning, Nick, good to be with you.

EICHER: Let me begin with the Fed, David. This was the Fed’s last meeting of the year, it was at once no big surprise, but also very significant. I’ll quote The New York Times reporting, “The Fed penciled in three interest rate cuts for next year. In all, it’s likely to be three quarters of a percentage point, projected to lower the Fed’s prime lending rate to below 5%, down to 4.6%.” That's a notable drop from what the Fed said back in September. The Times noted the Fed announcement sent the Dow Jones Industrial Average to a record high. The S&P 500 also achieved that marker when you consider the so called Total Return basis. Treasuries rallied as well. Anyway, David, instead of interest rate hikes or holding high rates in place, now we’re talking about cuts.

BAHNSEN: Yeah, I think it’s pretty bad reporting from the New York Times in the way in which they present it and yet, a lot of the facts in there are somewhat accurate. But I want to be really clear: there was nothing that they reported there that was a surprise, the futures had been pricing all of that and then some well before the press conference of last Wednesday. What I believe Chairman Powell did last Wednesday, that will be in the history book, at least the history books that me and my people read, I mean, related to finance, is he actually said, well in advance of any rate cuts, any discussions of rate cuts, that they were looking at three rate cuts next year. It was the fact that he admitted it does not mean Oh, wow, now the markets are excited, they’re going to cut 75 basis points. The markets already knew they were going to cut 75 basis points. 

By him admitting it, what he said is, we’re not going to cut any less than 75 basis points. That’s the real message. And so now you basically have a situation where there is a 100% chance in the Fed Funds Futures market, that there will be a 100 basis point rate cut by this time next year. There’s a less than 100% chance that it will be one and a quarter, one and a half and about 25% chance of one and three quarters. So you could be nearly at 2% lower a year from now. 

Now, the markets and financial conditions pricing this could be wrong, they could revise. But this was an absolutely stunning level of capitulation and surrender by the Fed chair as they get ready to close out 2023 and go into the election year of 2024.

EICHER: When you say capitulation, though, David, do you mean to say that Chairman Powell shouldn't have said what he said or shouldn't have done what he did?

BAHNSEN: No, I do not mean that. And it's a very good question, Nick. What I mean is capitulate from what he has been saying, which I have been saying is utter nonsense for six months. The financial markets were not in need of additional tightening, the inflation—and what we need to refer to in 2023 as rapid and significant disinflation—has been happening no matter what, that the conditions that they have been dealing with were on a trajectory and in some cases had arrived, producer price prices are at deflation, core goods are at 0% year over year inflation. And were it not for that obnoxious lag effect in the way they measure shelter, which is basically looking at leases that were signed a year ago. And each month you get another roll off from the year ago month that that is distorting the numbers, in my opinion, adding over 1% to the inflation rate. 

So they have something in the range of a 2-2.5 inflation rate now, and as he pointed out directly when asked about this, why start cutting before you get to the 2% target. He said that is absurd that we would wait to get there. And he’s right. There is a lag effect in monetary policy, one of Milton Friedman's most famous lines and that if they wait to get to two, then they will wait too long and overtighten, etc. What Powell said Wednesday is exactly right. It was just true six months ago as well. Now do I think they’re gonna get very lucky here, that we will avoid a recession, that they will have limited the damage they did to certain pockets, such as the breakdown of a few pretty big regional banks, certain aspects of commercial real estate? I think that’s possible. We shall see. But there was no question, especially as you saw the Bank of England and the European Central Bank the very next day, not say the same thing, say, you know, we’re not ready to talk about cuts. The Fed led the way in hawkishness a couple of years ago, meaning tighter monetary conditions that are leading the way in dovishness. Now, that’s all I mean, by capitulation.

EICHER: Well, now for good reason, we don’t pay a whole lot of attention to United Nations climate summits. But this one, David, COP-28 seem to yield some news. The delegates agreed to transition away from fossil fuels this decade, and to do so in a just, orderly, and equitable manner. As I read here, the US climate czar John Kerry said that “the transition to renewable energy is not going to happen magically because everyone sits there and does business as usual.” He said, “Business as usual has to change.” Does it alarm you at all, David, this talk of transitioning from fossil fuels?

BAHNSEN: Well, I suspect some would like me to say that it does. And I definitely understand the question, but I really want to answer you honestly, I want listeners to hear this. Nick, if you made a promise to me right now that you are committed to being a billionaire by 2040, would you want me to take it seriously? I mean, I think you’re a very resourceful guy, but I don't think you're gonna be a billionaire in 10 years. And I don’t think most people have the capacity to will themselves to being a billionaire. They can say that they want fairies to fly out of space. They’re not getting us off of fossil fuel by 2032, 2040, or 2050. And Saudi Arabia can say it, they’re not even going to try to do it. I mean, some of the countries, the problem is they actually try until Russia invades Ukraine, and then they have to go back to coal plants. So I think that it’s important in the sense that it provided a week of a lot of people to talk about it. But do I think it’s going to happen? Do I think it could happen if they wanted it? No, and no, so that’s where I don’t get real worried about it because I just don’t take it seriously.

EICHER: Alright, David Bahnsen, founder, Managing Partner, Chief Investment Officer at the Bahnsen Group, you can keep up with David bahnsen.com. You can read his Weekly Dividend Cafe commentary at dividendcafe.com. David, always great to talk with you, appreciate the time that you give us, have a good one.

BAHNSEN: Thanks so much, Nick.

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