Notes From The Desk – FOMC Rate Decision – A Hawkish 50
The FOMC kicked off the easing cycle with a 50 bps reduction in the ‘Fed Funds’ rate. Although several cuts are clearly coming, the FOMC did not express a sense of urgency.
The interesting bits:
- With one dissenter and 9 out of 19 members seeing a total of 75 bps of cuts this year rather than 100 bps, today’s move was likely to address any concerns that the Federal Reserve (Fed) is behind the curve.
- The dot plot revealed that the committee sees:
- The Funds rate at 3.4% by the end of 2025 while the bond market thinks it will be somewhere between 2.75-3%
- The long-run Funds rate (neutral rate) moves up from 2.75% to 2.9%
- The Fed sees that the risks to inflation and employment are roughly balanced
- The Fed remains data-dependent
The implications:
- Unless the employment data deteriorates, we should see a string of 25 bps rate cuts into next summer
- The Fed’s view of a higher neutral rate makes it difficult for long yields to push lower
- We remain skeptical that long rates offer value
Market Response:
The US yield curve has steepened, with 2-year yields higher by 2 bps, while 10-year yields are higher by 6 bps reflecting the reduced odds of another 50 bps move and a higher terminal rate.
