Picture this: You’re attending an interminable dinner party, stuck in an endless loop of discussing the same topic over and over again. That’s what it often feels like for me, when I write yet another analysis of Federal Reserve monetary policy. But the Fed controls money supply, and liquidity is the lifeblood of financial markets.

So grab your coffee and brace yourself for yet another dissection of Fed policy, because as tiresome as it sometimes seems, there’s no escaping the gravitational pull of the central bank’s influence on Wall Street.

The Fed’s policy-making Federal Open Market Committee (FOMC) surprised no one on Wednesday, when at the end of its two-day meeting the FOMC kept its benchmark interest rate target at the range of 5.25% to 5.50%.

In its official statement, the FOMC struck a cautious but reassuring tone:

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

FOMC officials maintained their outlook for three quarter-point rate cuts in 2024, based on their dot plot, but forecast fewer cuts than before in 2025 due to the recent uptick in inflation. The FOMC also boosted its outlook for U.S. gross domestic product (GDP) growth in 2024 from 1.4% to 2.1%.

Opaque no more…

Testifying before a Congressional committee back in 1987, then-Fed Chair Alan Greenspan famously said: “If I seem unduly clear to you, you must have misunderstood what I said.” This sort of opaque language was part of what Greenspan called a “language of purposeful obfuscation.”

Those days are long gone. Current Fed Chair Jerome Powell has proven to be loquacious, sometimes too much so, with a demonstrable knack for talking down the markets. Fortunately, this dynamic did not unfold at his lectern today.

At his customary post-meeting presser, Powell reiterated that policymakers still intend to cut rates before the end of 2024, assuming economic growth continues and inflation doesn’t flare up.

“We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said.

The Fed’s non-action and Powell’s dovish tone boosted investor sentiment. The major U.S. stock market averages closed sharply higher Wednesday as follows:

• DJIA: +1.03%
• S&P 500: +0.89%
• NASDAQ: +1.25%
• Russell 2000: +1.92%

The Dow Jones Industrial Average, S&P 500 and NASDAQ all posted record closes. The benchmark 10-year U.S Treasury yield (TNX) slipped 0.56% to close at 4.27%.

Wall Street expects the Fed to start cutting rates in June. Historically, rate cuts have tended to buoy equity markets, as investors interpret them as a signal of the central bank’s commitment to supporting economic growth. Lower interest rates stimulate economic activity and make stocks relatively more attractive compared to fixed-income investments, leading to increased demand for equities.

As the following chart shows, during 11 past instances when the Fed initiated its first interest rate cut after a prolonged cycle of tightening, the S&P 500 posted a strong six-month performance nine times (see chart):

However, the efficacy of rate cuts in stimulating economic growth is contingent upon various factors, including the prevailing economic conditions and the magnitude of the rate cut.

In some cases, the impact of rate cuts may be muted if other headwinds, such as geopolitical tensions or structural imbalances, dampen consumer and business sentiment. The S&P 500’s 12.4% decline in the six months after the 2007 rate cut came during the formidable headwinds of the Great Financial Crisis. In 2001, the carnage of the dot.com bust also mitigated the benefits of a rate cut, with the S&P 500 falling 8.4%.

Moreover, if investors perceive rate cuts as a response to worsening economic conditions or escalating risks, it could trigger concerns about the underlying health of the economy, leading to heightened volatility in financial markets.

Regardless, history has shown that even a Fed “pause” is a catalyst for lower bond yields and higher equity valuations. The current monetary policy backdrop is bullish.

Read This Story: Understanding Crypto, Part One: What Makes Bitcoin Tick?

I also expect the cryptocurrency market to soar in 2024. Consider this fact: the “blue chip” of crypto, Bitcoin (BTC), gained 156% in 2023. This year, BTC and the broader crypto realm are building on those gains, driven by the introduction of Bitcoin exchange-traded funds (ETFs) and the “halving” event expected in April.

Every portfolio should have some sort of exposure to crypto. But you need to be informed, to make the right choices. Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: