Financial Markets Won’t Take No for an Answer

Like a petulant child determined to get their way no matter how many times their parents say no, financial markets continue to rally in anticipation of imminent rate cuts that Uncle Jerome and other Federal Open Market Committee (“FOMC”) officials have signaled they aren’t yet ready to give. Perhaps if they just hold their collective breath long enough, the adults in charge of monetary policy will give in to their wishes.

Arguably, the tactic has worked before — namely with the famous Taper Tantrum of 2013, which delayed and diminished the Fed’s withdrawal of unprecedented (at the time) QE stimulus, and the sharp (and nameless) market sell-off in late 2018 in response to Fed tightening.1 In the latter case, the markets recovered entirely within the first few months of 2019 once the Fed backed away from further tightening and then began cutting the funds rate by mid-2019. In both instances, fierce market sell-offs expressed the markets’ displeasure with Fed policy actions and likely influenced subsequent Fed decisions to some degree. This time, it’s the opposite: markets have rallied sharply across the board since September in anticipation of the Fed opening the cookie jar after nearly two years of snacking deprivation — and effectively are daring the Fed not to disappoint.

Admittedly, it sounds odd to attribute such deliberate motives to an inanimate actor like “the markets,” but there have been several instances in the last decade or so when it seemed that the tail was wagging the dog with respect to financial markets and Fed policy. Despite its reputation (indeed, its mandate) as an independent and apolitical institution for implementing monetary policy, the notion that reactions of financial markets hold no sway over Fed policy decisions has become a harder argument to make ever since 2009. And financial markets definitely know what they want: a perpetual sugar high.

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