Oh dear. A lot of investors just learned again, the hard way, the old rule: When someone tries to tell you something about themselves, listen.
On Wednesday afternoon Federal Reserve Chairman Jerome Powell said over and over again: We’re not done raising interest rates. We’re not finished. We’re not expecting to cut rates any time soon. Barring a complete surprise, we’re not expecting to start cutting rates this year. We would much rather raise rates too high and keep them high for too long than start cutting them a moment too soon.
Read: The blowout jobs report is actually three times stronger than it appears
Wall Street didn’t listen. Investors began penciling in early rate cuts. Risk assets boomed. Nasdaq was up. Crypto was up. Cathie Wood was up. Michael “The Big Short” Burry actually deleted his Twitter account, after his “sell” call looked so foolish.
January’s blowout jobs report, posted Friday morning, showed nonfarm payrolls rose by nearly three times as much as economists had been expecting.
No, the economy isn’t slowing.
No, the Fed’s big campaign of interest-rate hikes all last year hasn’t shown up yet on Main Street.
And no, there’s no reason to expect rate cuts any time soon.
If you want to know what these numbers mean, look no further than the money markets, where people are betting on where interest rates are going to be.
In the wake of the report, Wall Street just halved — repeat: halved — its prediction of an interest-rate cut this year. Thursday afternoon, money markets gave a 60% chance that rates would start to come down by the end of this year.
Friday lunchtime, that was down to a 30% chance.
Meanwhile the market has now dramatically raised the likelihood that the Fed will raise rates two more times this spring. Thursday, Wall Street figured Powell would be one and done: That he would raise rates on more time, by 0.25 percentage points, and that would be it. Now the market is giving about a 60% chance of at least two hikes, and maybe even three.
The only real surprise is why this is a surprise.
I’ll concede I don’t follow “Fedspeak” as much as the media’s semiofficial interpreters. So I’m not as sensitive as they are to the various linguistic nuances that they claimed to discover from Powell’s conference. But as I wrote here, he seemed pretty clear to me. He would now — and especially after the last couple of years—much rather be the guy that held rates too high for too long in the future than be the guy who cut them a day too soon.
And yes, although he used the word “disinflation” a lot during his press conference, he also said that so far it could only be seen in the prices of goods, not services. An observation that anyone could have made for months by visiting a gas station.
I spent Thursday emailing various very smart financial people to ask if somehow I had tuned in to a different Jerome Powell press conference to the one watched by the stock and bond markets, and they confessed they were as baffled as I was by the euphoric reaction.
By Friday afternoon both stocks and bonds were down sharply. This was painful news for those who chased the market earlier. Interest rates jumped along the curve. Bonds are like seesaws: When rates (or yields) go up, prices go down.
When the Fed chairman says he’s going to keep rates higher for longer, who are you gonna believe: Wall Street or your own ears?