From October 31st (just before the prior FOMC meeting) to today, there has been a tremendous rally in U.S. Treasuries. The yield on the 2-year note fell from 5.08% to 4.54% (earlier this month), and this morning it sat at 4.69%. The 10-year yield fell from 4.93% to 4.10%, and this morning, it registered 4.17%.
This rally was partly initiated by Fed Chair Powell’s press conference commentary on November 1st (specifically, his statement that “we’ve come very far with this hiking cycle” was interpreted by markets as indicating that actually, this could be the peak in the cycle). The rally was further fueled by several economic data points received during the month of November, including unemployment moving slightly up to 3.9% on 11/3 and CPI falling slightly further than expected on 11/14.
If this is indeed the peak in the current hiking cycle (note, the Fed really wants us to believe that there is a chance it is not), then the next question for markets to grapple with is – how long do we remain in restrictive territory? In other words, when will rate cuts take place, and how many will there be in 2024?
Recall that September’s Statement of Economic Projections contained the expectation of one more 25bp rate hike in 2023, and only 50bp of cuts in 2024 (as opposed to June’s 100bp). But with a hike being off of the table at today’s FOMC meeting, a median dot of 5.125% for Dec 2024 would equate to only one cut next year.
However, the last six weeks of economic data, Fed commentary, and market activity have caused market participants to fall significantly out of alignment with September’s Fed guidance, as they now expect between 100 to 125bp of cuts to take place in 2024.
Today’s revised SEP should help reconcile this divide as we receive another updated Dot Plot, as well as updated projections on GDP, unemployment, and inflation over the coming years.
At the conclusion of today’s FOMC meeting, the last one in 2023, the decision was made to once again leave the Fed Funds rate unchanged. The Fed Funds rate has been held at its present range of 5.25 – 5.50% since the July 2023 FOMC meeting.
The statement indicated that economic growth has slowed from its strong pace in the third quarter. It also gave a nod to slowing inflation, indicating that “Inflation has eased over the past year but remains elevated.” Finally, the word “any” was added to “In determining the extent of any additional policy firming that may be appropriate…” hinting that there is less likelihood of additional hikes in this cycle.
New Economic Projections
The most significant changes to this quarter’s Statement of Economic Projections (SEP) document have been highlighted below:
1| Three 25bp rate cuts are now projected in 2024, though the range of estimates is wide.
2| Core PCE Inflation is expected to fall lower, matching Headline PCE at 2.4% by year-end 2024.
3| GDP was revised down slightly, from 1.5% to 1.4% in 2024.
4| Unemployment projections remain unchanged at 4.1% for the next years.
The Press Conference
When asked how we should interpret the addition of the word ‘any’ to the statement, Powell said, “We added the word ‘any’ as an acknowledgment that we are likely at or near the peak hike in this cycle. However, participants didn’t want to take the possibility of further hikes off of the table.”
Powell admitted that rate cuts were starting to be talked about and likely will continue to be talked about at future FOMC meetings.
It’s good to see the progress we’re making on inflation; we just need to see further progress.
The Market Reaction
2-year Treasury yields fell 20bp upon the release of the decision and S.E.P. today and kept falling another 10bp during Powell’s press conference to around 4.42%. The 10-year Treasury mirrored this move, briefly touching 4.00%. CME’s FedWatch tool now projects over a 75% chance of at least a 25bp rate cut in March 2024.
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