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The Fed puts doubts on rate cuts, does the market believe it?

The Federal Reserve has put doubts on whether or not it will cut interest rates with comments from Fed Chair Jerome Powell saying "it would be premature" to say with certainty that the Fed's work with interest rates is done. Investors have certainly reacted to those statements as the market has seen a small retreat from the recent rally. Octavio Marenzi, Opimus CEO, joins Yahoo Finance to give insight into what could be the next moves from the central bank and how the market may react.

"I think he is sincere in what he says so I would take him at his word," says Marenzi. "I think the market might well yet be getting ahead of itself here. We've seen some different asset classes – bonds, equities, gold, bitcoin – all those different areas basically predicate on the idea that the Fed is going to cut interest rates as severely in 2024. I don't see much evidence of that right now, and I think that might be a very big disappointment if that doesn't come to pass."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLLE AKUFFO: Well, it looks likely that the Federal Reserve will hold interest rates at its policy meeting next week. But investors want to know what's in store for the new year. Fed Chair Jay Powell has been making signals that we should not count on rate cuts. But the market seems to feel otherwise.

Joining us now is Octavio Marenzi, Optimas Chief Executive Officer. So Octavio, what is your take on this? Do the markets have it right? Are they calling the Fed's bluff here?

OCTAVIO MARENZI: Listen, Jay Powell is a remarkably simple central banker to actually understand. He's remarkably clear and to the point. And I think so far he basically says what he means and means what he says. And so I would take him at his word when he says higher for longer, don't count on rates coming down any time soon.

I mean, he has got in his econometric department have sort of got some of the forecasts badly wrong over the course of the past year. But I think he's sincere in terms of what he says, so I would take him at his word. I think the market might well be getting ahead of itself here.

We've seen a run up in so many different asset classes-- bonds, equities, gold, bitcoin. All those different areas basically predicated on the idea the Fed is going to cut interest rates severely in 2024. I don't see much evidence of that right now. And I think there might be a very, very big disappointment if that doesn't come to pass.

AKIKO FUJITA: So Octavio, what does that mean in terms of the recent rally that we've seen in the markets? We're seeing a bit of a breather today after five straight weeks of gains. But if what we take the Fed chair at his word, those rate cuts aren't coming soon. Are we likely to see this rally fizzle out?

OCTAVIO MARENZI: I think we've seen one or two rallies before fizzle out over the course of the past year or two. We've seen that happen before, where the market basically thinks, well, they must cut rates now. They can't possibly carry on increasing them. And what comes to pass is that in fact, they do keep rates higher. They're going to keep them there longer, and I think we might well see this rate fizzle out as well, this rally fizzle out as well.

Now, that being said, it's very hard to get yourself inside the Federal Open Market's Committee head and try to figure out exactly what they're thinking. And there's different people on that committee are going to vote in different directions. So it's somewhat difficult to say exactly where it's going to go and say that with any sort of certainty.

But I think the balance of the risks are basically that we see the Fed not touch interest rates now or in January or in February or March. They're basically they're going to adopt a wait and see strategy and basically wait for inflation to come down very, very slowly. Bear in mind it shot up much faster than they thought. It stayed higher much longer than they thought. They don't want to make the same mistake again and leave inflation too high.

So they're going to err on the side of caution here and basically leave those rates up there, I think. And that's where the balance of the risks are. And I think we might see a lot of people disappointed this rally does not have legs that is going to fizzle out again.