Notes From the Desk – FOMC Meeting – Release the Hounds
As expected, the FOMC kept the policy rate unchanged at 5.25-5.5%. The far more interesting items were buried in their press release and conference.
The dot-plot thickens.
- No further hikes are indicated.
- A rate cut was added to 2024 for a total of 75 bps.
- 100 bps of rate cuts are forecast for 2025.
But more importantly.
While the headlines will focus on the infamous ‘dot-plot’, we think the more interesting development was their forecast for core-PCE (the Fed’s favourite inflation measure).
- 2024 core-PCE lowered from 2.6% to 2.4% and moving down to 2.1% in 2025.
- Inflation expectations lowered with a minimal change to growth and unemployment.
The Implications.
In our opinion, this is very clearly a shift in stance from hawkish to neutral.
- With the disinflation process underway, it suggests that weaker economic growth would be met with more aggressive rate cuts than currently forecast.
- Rates have dropped 13-28 bps, led by 2y yields.
- Unless inflation reaccelerates, we expect any increase in rates to be met by buyers.
