Obsessing Over the Fed’s Next Move

The bond market opened higher this morning in reaction to a New York Federal Reserve report on rising credit card delinquencies (see below). Long-term Treasury bonds are up about .8%, intermediate corporates are up .5% and even short-term bond funds are up about .2% in early trading. Bonds are clearly leading the parade, dragging all other asset classes behind. Stocks opened mostly lower, the dollar fell against other currencies, and commodities rallied a bit.

Stock & bond markets are laughably myopic at the moment. The fuss is all about when and how much the Federal Reserve will cut interest rates this year. From day to day those bets change depending on newsflow. For example, yesterday’s economic data were positive, feeding the narrative that the Fed can’t cut interest rates because economic growth is too strong. But this morning’s major headline about credit card delinquencies supports a competing narrative that Fed rate cuts are necessary now in order to help consumers. All of this just encourages choppy day-to-day trading activity without much meaning.

Last week the Federal Reserve wrapped up its monthly policy meeting and said nothing new. As expected, the group declined to either raise or lower interest rates. Chair Powell acknowledged the obvious: inflation is slowing and the economy is still holding up very well. But of course, interest rates remain “restrictive” to economic growth And that’s why—as long as inflation continues to moderate—the Fed will begin to lower interest rates at some point this year. Officials have been clear that the current level of rates is not meant to be sustained over the long run.

Today’s report from the New York Federal Reserve Bank highlights the meaning of “restrictive” and explains why rates need to move lower. Consumer credit card balances are rising, and combined with much higher interest rates, are pushing delinquency rates higher. This is especially true for younger and lower-income households. The bank said that while overall loan delinquency rates are still below pre-pandemic levels, those for credit cards and auto loans are now higher. In fact, about 8.5% of credit cards moved into delinquency during the fourth quarter. In total about 10% of credit cards are 90 days behind on minimum payments. Perhaps that’s not terribly surprising considering that card interest rates have spiked to between 22% and 30%.

This is just another reminder that it doesn’t pay to hyper-focus on daily newsflow. Intermediate and long-term trends are far more important, and in these the Fed has generally been astute. Thus far the Fed has done a commendable job navigating the post-pandemic inflationary crisis and we don’t expect them to become tone-deaf now. Whether the first rate cut occurs in March or June, lower rates are coming.