In line with market expectations, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged in a target range of 5.25% – 5.50%. There were no dissents.  

Committee Statement:

• Economic Assessment and Outlook
  • The economic assessment recognized the easing in inflation over the past year as well as the slowing in growth relative to the third quarter.  
• Current Policy and Forward Guidance
  • “Any” future policy firming remains data dependent and will depend on the impacts of the cumulative tightening in policy and the lags in which policy impacts the economy. 

Summary of Economic Projections:

• The dot plot gave us a refreshed view of the Committee’s expectation for the path of the Fed Funds rate, which showed the vast majority of participants anticipate rate cuts in 2024 and all participants see some rate cuts as appropriate through the forecast horizon.
  • The median member expects the policy rate to fall to 4.625% by YE 2024 which is equivalent to 75bps of rate cuts in 2024. Only two members expect the Fed to keep the policy rate unchanged next year.
  • The median member expects 100bps of cuts in 2025 and an additional 75bps of rate cuts in 2026 which would put the policy rate at 2.875% by year-end 2026.
  • The long run dot was unchanged at 2.5% but 7 participants see the long-run dot higher.
• Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
  • Core PCE was revised down 50bps to 3.2% in 2023 and revised down by 20bps in 2024 to 2.4%. The number of participants viewing core inflation risks as weighted to the upside declined to 8 which is the lowest number of participants since March 2021. Headline PCE was revised down by 50bps to 2.8% in 2023. The committee expects headline inflation to fall to 2.4% in 2024, 2.1% in 2025 and 2% in 2026.
  • Growth was upgraded in 2023 from 2.1% to 2.6% in 2023 but downgraded from 1.5% to 1.4% in 2024. Longer term growth was unchanged at 1.8%.
  • Unemployment rate estimates were mostly unchanged reflecting a soft-landing outcome. The median committee member sees unemployment rising to 4.1% in 2024 but not rising any further. No member sees the unemployment rate rising above 4.7% through 2026.

Key Takeaways from Chair’s Press Conference:

• While the Chair was clear that it is premature to declare victory and they would continue to “move carefully”, rate cuts were part of the discussion today and he expects they will continue to be part of the discussion in future meetings. The risk of overtightening and under tightening have become more balanced and they are aware of the risk of keeping policy rates too high for too long. Chair Powell expects the Fed to cut before they get to 2% on inflation otherwise it would be “too late”.
• The Committee added the word “any” to describe additional policy tightening to reflect the rising probability that we are at or near the peak of the policy rate without taking the possibility of addition rate hikes completely off the table.
• When asked if he was comfortable with market pricing of rate cuts beginning in March, he said they were not focused on the market pricing but instead focused on what is right for the economy. The Chair also pushed back on the consideration of political events like the November election.
• On inflation, he “welcomes the progress” but highlighted that the year over year measures were still above the target meaning they would need to see more good inflation data to have more confidence. He said that the recent inflation data (CPI and PPI yesterday and today) would have been incorporated into their forecasts.
• On the labor market, he judged that outcomes have been better than expected but coming into better balance. On growth, Chair Powell said there is good reason to believe growth would slow next year.
• On QT, the Chair said they were not discussing changes to balance sheet rundown at this time and that there are still ample reserves in the system. If the Fed is cutting rates, balance sheet policy will depend on why they are easing policy.

Our View:

• The risks to monetary policy are now fully balanced. The cumulative and lagged impacts of monetary policy are tightening financial and credit conditions.
• As we arrive at the end of the hiking cycle, the government bond market should see increasing demand from investors looking to lock in relatively high risk-free rates while they are still available. As a result, we continue to expect the 10-year Treasury yield to move lower towards a range of 3.5 – 4.0% in the first half of 2024.

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