FOMC Rate Decision - "See it to believe it" and "Higher for Longer"

The FOMC kept the interest rate unchanged at 5.25% - 5.50% and retained the dot plot for 2023 at 5.60%. Market is now pricing in 14.50 bps of rate hikes into 2023 from pre FOMC 11.50 bps. The median projections were revised higher by 50 bps for 2024 and 2025 to 5.10% ( June 4.60%) and 3.60% ( June 3.10%) while retaining longer run projections for Fed Fund Rates at 2.50%.

Markets repriced the 2024 FFR from 4.62% pre FOMC to 4.76%. Market pricing is now in divergence from Fed's guided path by 34 bps. This makes the data on inflation, employment, consumer spending extremely critical and could add to choppiness going forward. On rate cuts, markets are pricing in 25 bps of rate cuts by June of 2024 and another 50 bps of rate cuts by Dec 2024.

Interestingly, the estimates of GDP were revised higher by 110 bps for 2023 and 40 bps for 2024 with long run estimates for GDP retained at 1.80%. Unemployment (U/R) was revised lower by 30 bps for 2023 and 40 bps for 2024 and 2025. Headline PCE inflation was revised a tad bit higher (10 bps) for 2023 to 3.30% and Core PCE inflation was revised 20 bps lower.

So the median thinking of FOMC centers on higher for longer rates, strong economic growth momentum in line with long run potential GDP growth and lower natural rate of unemployment with moderate inflation.

The question naturally arises

a. What would make the Fed think the FFR is sufficiently restrictive to not warrant another hike
b. For how long the Fed would keep the rates at restrictive levels
c. When does the restrictive rate start biting into the economic activity to warrant cuts
d. And the magnitude of cuts.

The economic outlook faces uncertainty from looming government shutdown, the end of federal childcare funding, resumption of student debt payments, rising oil prices and auto strike.

Take away from the press conference could be summed up as Fed would like to see conclusive evidence which points to a declining trend in inflation rather than rely on 3 months of encouraging data ( Jun - Aug) and a better balanced labor market to determine if policy is at sufficiently restrictive levels. Fed would want to follow a measured approach to decision making. The decision to upward revise 2024 FFR by 50 bps was driven not by concerns of persistent inflation but stronger economic activity. The neutral rate, policy rate considered neither stimulating or restricting economic growth may have moved higher.

Comments

The Moment of Reckoning is here !! 25 or 50 Bps and the SEP || Benign PCE Expectations || USDJPY 145.75 or 137.50 ??

“Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme and people start to say "this time it's different." They cite the changes in geopolitics, institutions, technology or behaviour that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero.” ~ Howard Marks Bonds continued to rally this week with yields on US2s printing a high and low range of 3.71% - 3.55% to close the week at 3.584% and US10s printing a high and low range of 3.76% - 3.6050% to close the week at 3.655%. I highlighted in my blogpost on Aug 31, the triangle breakout target at 15.50 bps on US2s10s. We dipped to -0.004% on the CPI release and closed the week at 0.0710%. On Crude Oil prices we dipped to lows of $ 68.71 but closed the week higher at $ 72.09. ECB annou...

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"I fear not the man that has practiced 10,000 Kicks once, but I fear the man that has practiced one kick 10,000 times." ~ Bruce Lee Morning Everyone , This Week gave us a sense of how the prices or inflation has evolved and we had benign readings across CPI and PPI and the updated PCE estimates are now for a reading of 0.01% mom on the headline PCE and -0.01% on Core PCE Prices which translates to an annual reading of 2.4% yoy and 2.4% on Core PCE Prices. The Implied pricing off Fed Fund Futures is now pricing in o ne full 25 bps of rate cut into the September Policy and 61 bps of cumulative rate cuts for 2024. If you go further out the curve, 100 bps is priced in until March 2025 and 138 odd bps until June 2025. In the 23rd June Wrap, I had written On the DXY, 106.25 is a crucial resistance zone for DXY bears and an important point of reversal. So keep a watch on the levels with SL above 106.75. DXY declined over the last 2 weeks fro...

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As Howard Marks says The most important thing is "Awareness of the pendulum'. The mood swings of the market resemble the movement of a pendulum. Although the mid point of the arc best describes the location of the pendulum "on average", it actually spends very little of its time there. In fact, it is the movement towards an extreme itself that supplies the energy for the swing back. Investment markets follow a pendulum like swing - b/w euphoria and depression, between celebrating positive developments and obsessing over negative ones and thus between over priced and underpriced. While we may not know what the futures holds but me must have a fair sense of where we are headed. I hope this blog has helped you navigate the course of the markets by identifying these pendulum type swings and through the analysis, has helped you get a sense of how the data is evolving. The Economic calendar was heavy with Top Tier Data. BoJ raised the overnight call rate by 15 bps to 2...

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One of my favorite poem is by Kahlil Gibran and thought I'd share a couple of lines with you all... Do not live half a life and do not die a half death If you accept, then express it bluntly, Do not mask it If you refuse then be clear about it for an ambiguous refusal is but a weak acceptance Do not accept half a solution, Do not believe half truths, Do not dream half a dream, Do not fantasize about half hopes To reach and not arrive, Work and not work The half is a mere moment of inability, but you are able for you are not half a being You are a whole that exists to live a life not half a life” On that note, quick weekly roundup for the US markets below: The Fed Fund Futures are pricing in 88% probability of a rate cut by September Policy. The Atlanta FED GDPNow Estimates for Q3 growth readings are running at 2.8%. The Cleveland Fed estimates for Core CPI and Core PCE are running at 0.27% and 0.22% respectively mom. In the last blog piece...

Shroedinger's Cat ~ Preparation is the Key to play markets || US Politics || Macro Musings

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