Notes from The Desk – FOMC Meeting – The Dot Plot Thickens
The Federal Reserve (Fed) raised the overnight rate by 25bps on Wednesday afternoon, bringing the range to 4.75-5%. The Fed also softened the language about future rate hikes indicating that they will be fully data-dependent.
The dot-plot.
- The median projection for the terminal Fed Funds rate remains at 5-5.25%.
- The ‘dots’ do not forecast a cut this year.
- The median projection for the end of 2024 moved slightly higher to 4.3%.
- The long-run projection for the Fed Funds rate remains at 2.5%.
The de-presser.
- Chairman Powell stressed that the banking system was sound. However, he expects banks to restrict some lending activities which will tighten financial conditions. This leaves less for the Fed to do in the fight against inflation.
- The Fed continues to expect improvements in CPI.
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- The prices of goods continue to fall as supply chains improve and demand declines.
- The housing portion of core CPI remains elevated. But given the decline in new lease rates, relief is on the way, and the Fed will ignore the housing component.
- Non-housing core inflation is still seeing upward pressure because of tight labour markets.
The reaction.
- Yields are 15-20 bps lower, as bond traders bet the Fed will ease this year (despite the dot plot).
- The curve is implying a 50% chance of another hike in May and for cuts to take us down to ~4.2% by year-end.
- Stock markets rallied and then sold off. As bond nerds, we have always struggled to understand our cousins in the equity world.
