Despite being only a few weeks into January, initial rate cut expectations are already in flux as central banks consider mixed economic data. This week, the odds of a rate cut at the Federal Open Market Committee’s (FOMC) meeting in March slipped from 81% to 55% as the markets price in recent inflation and spending data, along with fresh commentary from Federal Reserve officials. However, it’s not just economic data that central banks have to contend with. In recent years, volatility and uncertainty prompted by a global pandemic, geopolitical conflicts, and other events, such as increased energy prices last year, have influenced monetary policy. Yet, despite the heightened complexity and persistent unpredictability, Nasdaq Chair and CEO Adena Friedman believes that “markets and business have proven remarkably resilient.”
While Fed officials have signaled some rate cuts for this year, Friedman noted that the big question is when the cuts would start, expressing concern about starting too early. While inflation data is “heading in the right direction,” she acknowledged that the Fed also expects this to moderate, which, in turn, will make it harder to bring rates down.
“But [the Fed] also wants to make sure that they feel like they've really gotten to a state of stability around the rate before they start making significant moves in the interest rates,” Friedman said during a panel discussion on “The High Rate Reality” at this week’s World Economic Forum in Davos, Switzerland.
The next FOMC meeting, which takes place on Jan. 30-31, will provide greater clarity into the Fed’s rate cuts plan, and while Friedman said she will not try to speculate when the cuts will occur, she acknowledged that the markets do try to predict the Fed’s next step.
“What happens in the markets as a result of this notion [is] that there could be a lower cost of capital as you go through the year, [and] investors can start to think about having model company earnings over the future more successfully. They can say, ‘Well, I know that the cost of capital is not likely to go up, so then I can at least put in a stable cost of capital as a foundational element of their model.’ They also know that inflation is coming down. So, they also know that the cost of doing business is also moderating. That also gives them more confidence,” Friedman said.
Fellow panelist Gita Gopinath, deputy managing director of the International Monetary Fund, echoed similar sentiments, noting that “there has been a lot of resilience in the economy despite the rate hikes that we have seen.”
“What is uniformly true is we have households and corporations with stronger balance sheets, and we've seen effects, but we've also seen resilience,” Gopinath said. “Labor markets are slowing, but at a much more gradual pace, which is why, at the IMF, we feel like [there is] a soft-landing scenario. The probabilities have gone up quite a bit because we've had inflation come down without needing that much of a loss in terms of economic activity.”
With the economic environment starting to normalize, “the table could be set for a vibrant economy in 2024,” Friedman wrote in her 2024 Outlook, unveiled ahead of Davos.
The growing confidence in the markets also shows up in market value, Friedman said during the panel discussion, adding that while market performance was “top-heavy” last year, there are already broader-based improvements in valuations this year.
“The broader market small caps are now starting to show some improvement in valuations and others because they know that the cost of capital is likely to be stable to lower going forward,” Friedman said. “I think that will also drive an interest in investors wanting to put risk capital to work, which means the IPO (initial public offering) market opens back up again.”
She continued to say that there are about 85 companies that have filed to go public on Nasdaq. “They’re starting to gain more and more confidence that [their IPO] could happen in the first quarter or second quarter — most likely more in the second quarter. But there'll be some bellwethers in the first quarter.”
As companies look for opportunities amid the normalizing economic environment, Friedman expects to see bolder, conviction-driven investment decisions after companies spent the past several years working toward becoming more resilient by focusing on getting to positive cash flow and embracing new technologies to fuel their growth.
“They’ve spent their time calling their investments, making certain conviction bets, and driving a positive cash flow if they’re not already profitable. I think that’ll also make them stronger if the markets come back, cost of capital goes down, investors are more confident, and they’re more resilient,” Friedman said. “That actually is good for markets, good for the company, good for the economy.”