Federal Reserve Rate decision - Do you see any signs of Pivot???

Federal Reserve Rate decision

The overarching theme of the FOMC was price stability and that Federal Reserve would like to see compelling evidence that inflation is moving down, consistently with the 2% inflation target. That would mean a restrictive stance of monetary policy, growth below trend, improved demand supply balance of the labor market.

On Sep 21, 22, FOMC raised the Fed funds rate by 75 bps to 3.00 - 3.25%. The committee marked down the GDP projections by 200 bps into 2023, increased expected inflation estimates by 20 bps into 2023 and shifted the terminal rates estimate higher to 4.625% from earlier 3.75%.

The table below captures the change in Fed funds target rate estimates since 2021. The table below implies 125 bps of rate hike in the next 2 policy meetings in Nov and Dec and another 25 bps of rate hikes into Q1 of next year. The market is now pricing 4.67% peak rate by May 2023 and thereafter 33 bps of rate cuts into the Q4 2023.

3.125%	Fed Funds target rate
	2022	2023	2024	2025	Longer run
∆	1.25	0.25	-0.75
Sep-22	4.375	4.625	3.875	2.875	2.500
Jun-22	3.375	3.750	3.375		2.500
Mar-22	1.875	2.750	2.750		2.380
Dec-21	0.875	1.625	2.125		2.500
Sep-21	0.250	1.000	1.750		2.500
Jun-21	0.125	0.625			2.500
Mar-21	0.125	0.125			2.500

The statement of economic projections have similarly reduced growth projections, increased U/R and inflation estimates.

SEP	2022	2023	2024	2025	Longer run
	*-1.5*	*-0.5*	*-0.2*
GDP	0.2	1.2	1.7	1.8	1.8
	1.7	1.7	1.9
	*0.1*	*0.5*	*0.3*
U/R	3.8	4.4	4.4	4.3	4
	3.7	3.9	4.1		4
	*0.2*	*0.2*	*0.1*
PCE Inflation	5.4	2.8	2.3	2	2
	5.2	2.6	2.2		2
	*0.2*	*0.4*	0
Core PCE inflation	4.5	3.1	2.3	2.1
	4.3	2.7	2.3

The market reaction can be summed up as stronger USDs and higher US Treasury Yields. The DXY posted a high of 111.80 and faces resistance in the 112 - 112.40 area where the current trend could stall.

	pre FOMC low	post FOMC	Change
US 2YT	3.91%	4.16%	0.25%
US 5YT	3.70%	3.94%	0.25%
US 10YT	3.50%	3.72%	0.22%

75 bps hike was fully priced into the market then why did the markets bleed post policy.

Fed Chair Powell killed the "Pivot narrative" and suggested higher rates for longer rather than feeding into market expectations of policy pivot on deterioration in economics. Dec 2023 FF contract was pricing in Dec end rates at 4.07% ( price 95.93) which is currently being priced at 4.375% (price 95.625).

It was an all out hawkish policy.

Comments

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