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.  

There were several changes to the committee statement:

• The economic assessment recognized that activity continues to expand at a solid pace.
• The comments on the stability of the banking system inserted in March 2023 were removed.
• The committee now judges the risks to achieving its dual mandate are moving into better balance.
• Most importantly, on current policy and forward guidance:
  • The Fed shifted from “in determining the extent of any additional policy firming” to “in considering any adjustments to the target range.” Combined with now balanced risks, this marks the end of the Fed’s hawkish bias and a shift toward neutral-to-dovish.
  • The Fed also stated it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”  In adding this sentence, the Fed is guiding the market toward rate cuts without confirming the market’s more dovish outlook. 

Key Takeaways from Chair’s Press Conference:

• Chair Powell believes the Fed is done hiking and cuts are expected this year: “We believe that our policy rate is likely at its peak for this tightening cycle, and that if the economy evolves broadly as expected, [we] will begin to bring back policy.”
• The Fed recognizes that there are risks to both easing too soon or too late and will make decisions meeting-by-meeting: “We know that reducing policy restraint too soon or too much can result in a reversal of the progress we have seen on inflation and too little can unduly weaken economic activity in employment.”
• With regards to a March cut, the Chair pushed back on the market and said that a March cut is probably too soon: “Based on the meeting today, I would tell you that I don't think it is likely that the Committee will reach a level of confidence by the time of the March [meeting].”
• In determining whether to cut sooner or hold rates longer, it will depend on the path of the labor market and inflation: “If we saw an unexpected weakening in the labor market, that would certainly weigh on cutting sooner.  If we saw inflation being stickier, or higher, we would argue for moving later.”
• In order to have conviction that the Fed will achieve its inflation mandate, Chair Powell doesn’t need to see better data but rather more good data. Specifically, as goods “flattens out [approximately at 0], that would mean the services sectors have to contribute more.”
• On QT, the Chair explained that they “are planning to begin in-depth discussions of Balance Sheet issues at the next meeting in March.”

Our View:

• The risks to achieving the Fed’s dual mandate of stable 2% inflation and maximum employment are more balanced, and we have reached the end of the hiking cycle. Looking ahead, it is now mostly a question of how fast and how far the Fed will cut rates. Given that the Fed is biased toward easing policy in 2024, treasury rates should see downward pressure in the year ahead. Furthermore, government bonds should see increased demand from investors looking to lock in relatively high risk-free rates while they are still available. As a result, we expect the 10-year Treasury yield to move down towards a range of 3.5 – 4.0% in the first half of 2024.  

09zg243101204631