Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group

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. 

Changes to the FOMC Statement:

  • The economic assessment continued to reflect healthy growth and labor markets. The statement acknowledged “modest further progress” toward their inflation objective, but it remains elevated. The risk to their dual mandate remains better balanced.
  • The forward guidance was unchanged. The Fed stated for a fourth meeting in a row that 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%.”

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 majority of participants continue to 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 5.125% by year-end 2024 which is equivalent to 25bps of rate cuts in 2024. Four members expect the Fed to keep the policy rate unchanged this year. No policy member sees more than 2 rate cuts this year.
    • The median member expects an additional 100bps of cuts in 2025 and 100bps of cuts in 2026 which would put the policy rate at 3.125% by year-end 2026 – unchanged relative to March.
    • The long run dot shifted higher to 2.75%. In recent months, Fed members have discussed the possibility that the neutral policy rate (also referred to as R*) is higher than previously anticipated.
  • Investors also received FOMC participants’ revised outlooks for employment, growth, and inflation:
    • The Core PCE forecast for 2024 was revised higher by 0.2% to 2.8%. The number of participants viewing core inflation risks as weighted to the upside remains elevated at 11 members.
    • Growth was downgraded modestly in 2024. Longer term growth was unchanged at 1.8%.
    • Unemployment rate estimates were also mostly unchanged reflecting a soft-landing outcome. The median committee member sees unemployment remaining around or slightly above 4% over the next three years.

Key Takeaways from Chair’s Press Conference:

  • On the dots:
    • Chair Powell views 1 or 2 cuts in 2024 as a close call: “I can't really distinguish between the two of these. They're so close, these are very close calls.”
    • He emphasized the Fed is not wedded to the dots because the committee remains highly data dependent: “It's a combination of their forecast and their own reaction function, but again, everyone would say that this is very data dependent, and I don't hold it with high confidence.”
    • Some committee members may have changed their dots after CPI, but most did not: “The initial CPI reading and its first-level translation to PCE, we did have this morning, we were briefed about it, and people were able to consider whether they should make changes, and as I said, some people generally do, but most people generally don't.”
  • On inflation:
    • Chair Powell continues to emphasize they will only cut rates if they have greater confidence inflation is moving sustainably toward 2%. That said: “the most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective.” 
    • While the last 2 inflation prints have been positive, the Chair explained: we'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%. We know that reducing policy restraint too soon or too much could result in a reversal of the progress we've seen on inflation.”
  • On the labor market:
    • With regards to the difference between the establishment and household labor market reports, Chair Powell explained they will take a holistic approach: “Sometimes you can't reconcile the differences, you just have to look at it and try to understand. That's why it always makes sense to look at a series in three, six and twelve months of things rather than just one report.
    • Regardless of the differences, the committee sees a strong labor market coming back into balance: “Nonetheless, the overall picture is one of a strong and gradually cooling, gradually rebalancing labor market. Job openings, while they've come way down, are still, greater than the number of unemployed people. The jobs workers gap is still a significantly positive number, great than it was before the pandemic. So overall, we're looking at what is still a very strong labor market but not the super-heated labor market of two years ago, or even one year ago.
  • On the balance of risks, the plan is not to wait until it’s too late: “We completely understand the risks and that's not our plan is to wait for things to break and then try to fix them. We're trying to balance these two goals in a way that is consistent with our framework.”

Our View:

  • Since the Fed last hiked rates in July 2023, core PCE (the Fed’s preferred measure of inflation) has decelerated by 200bps to 2.8% YoY but remains elevated and the unemployment rate has risen slightly to 4.0% but remains low. These developments justify the Fed’s decision to end the hiking cycle as the risks to achieving the Fed’s dual mandate of stable 2% inflation and maximum employment are now more balanced. The Fed remains focused on how soon, how fast, and how far the easing of policy will need to go.
  • Given that we still believe the Fed is biased toward easing policy at some point later this year, we view the risk to Treasury yields as asymmetric with sell-offs limited relative to the potential for rallies as investors look to lock in relatively high risk-free rates while they are still available. Nevertheless, markets will remain acutely sensitive to incoming economic data to the extent it confirms or refutes the Fed’s confidence that inflation is moving back toward target over time.
  • We expect the Fed to start cutting rates later this year and the 10-year Treasury yields to move towards a range of 3.75 – 4.25% as the Fed reduces policy restriction.
Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.