SGH Insight
(1) Monday Morning Notes, 3/18/24
We forego our usual Monday morning format to focus on the FOMC meeting and market implications.
We expect the FOMC will conclude its two-day meeting this week with few new signals about the direction of monetary policy. The Fed isn’t cutting rates this week, very likely isn’t cutting in May, and although the Fed is circling around a June cut, uncertainty around the inflation outlook leaves a June cut still up in the air. Given the time remaining before the Fed needs to decide on a June cut and that they don’t yet have a complete picture of the first quarter, FOMC participants are likely not in a rush to make substantial changes in the SEP projections.
To be sure, the balance of risks to our expectations are on the hawkish side for the SEP projections. And Federal Reserve Chair Jerome Powell can be something of a wildcard. Overall, though, we think the objective for the Fed is to get out of this meeting without making fresh waves in the financial markets.
(2) 3.Published on March 18, 2024
Inflation: Elevated January and February inflation readings create fresh base effects for the core-PCE forecast, but speakers have tended to see this as a bump in the road rather than reason to fundamentally reassess the inflation story. At least not yet. And recall that in December, monthly inflation readings were running below a 2% annualized rate and implied that the Fed would need to lower the inflation forecast in March. Recent numbers are in that sense a validation of the Fed’s December projections. Still, the clear risk is that the Fed pencils in a 2.6%, and either outcome will be considered hawkish as it indicates a direction of travel toward fewer than 75bp of rate cuts.
(3) Monday Morning Notes, 3/18/24
We think FOMC participants will reveal some increased hawkishness via an increase in the 2026 median dot. It is possible that the 2025 dot could rise as well, although the Fed’s models likely deliver a smooth transition toward normal via 25bp rate cuts each quarter. That means that the resilience of the economy and possibly an elevated neutral rate will lead to an earlier end to rate cuts than expected in December. Of course, if the 2025 median dot were to rise, the 2026 dot likely would as well, making the 2026 dot a safer hawkish bet. The risks are weighted toward the long run dot rising as well, but we can’t make this a high conviction base case. A higher 2026 dot would signal a de facto increase in neutral rate estimates without needing to commit to such an increase.
(4) Monday Morning Notes, 3/18/24
If questioned, Powell may need to explain his “not far” comment from Humphrey-Hawkins, and his explanation will make it sound further away than it first appeared because he can’t commit to June.
(5) Monday Morning Notes, 3/18/24
Pressed on the inflation outlook, we expect that we will restate the “bumpy path” story while adding that continued elevated inflation readings would imply that progress on inflation goals has stalled. He won’t kill a June cut, but he can’t credibly commit to it either.
(6)Monday Morning Notes, 3/18/24
The Fed will begin developing a plan for tapering quantitative tightening that will set guidance on the Fed’s longer run intentions for the size and composition of the balance sheet but won’t announce any such plans this week. The minutes of the January FOMC meeting foreshadowed this outcome:
In light of ongoing reductions in usage of the ON RRP facility, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee’s next meeting to guide an eventual decision to slow the pace of runoff.
Typically, the Fed begins these kinds of deliberations with staff presentations the first meeting, discussion of those presentations among FOMC participants at the following meeting, and a decision at the next meeting which might be guidance for future meetings or immediate implementation. That puts June as the likely earliest meeting for the Fed to announce a plan for the balance sheet, with the actual implementation likely later.
(7)Final Thoughts Ahead of the FOMC
On the issue of two versus three dots, we think that FOMC participants ultimately decide that whatever changes happen in the forecast will not be significant enough to force a re-evaluation of the policy path this week given that the median policy maker doesn’t expect a rate cut until June anyways. Indeed, recent data confirms that the Fed correctly decided to wait for additional data before committing to a rate cut.
Our sense is that market participants on net are protecting against hawkish outcomes tomorrow. That suggests that bonds rally if the Fed delivers an SEP with 75bp of 2024 rate cuts as expected.
Market Validation
(1) Bloomberg 3/20/24
Federal Reserve officials maintained their outlook for three quarter-point rate cuts this year but forecast fewer cuts than before in 2025 following a recent uptick in inflation.
Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.
Policymakers also lifted slightly their forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%, following speculation from economists that higher rates may persist in the post-pandemic environment. The change implies rates will need to stay higher for longer in the future.
Policymakers updated their projections for inflation and economic growth for 2024, raising their forecast for underlying inflation to 2.6% from 2.4%, and boosting the growth forecast to 2.1% from 1.4%. They also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.
(2) Bloomberg 3/20/2024
Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
o 2024 median PCE inflation 2.4% vs 2.4%
o 2025 median PCE inflation 2.2% vs 2.1%
o 2026 median PCE inflation 2.0% vs 2.0%
• 2024 median core PCE inflation 2.6% vs 2.4%
• 2025 median core PCE inflation 2.2% vs 2.2%
2026 median core PCE inflation 2.0% vs 2.0%
(3) Bloomberg 3/30/34
Median assessment of appropriate pace of policy:
• 2024 4.625% (range 4.375% to 5.375%); prior 4.625%
• 2025 3.875% (range 2.625% to 5.375%); prior 3.625%
• 2026 3.125% (range 2.375% to 4.875%); prior 2.875%
• Longer Run 2.5625% (range 2.375% to 3.750%); prior 2.5%
(4) FOMC Press Conference Transcript 3/20/24
>> Thank you, Chair Powell. Not to harp too much more on confidence and inflation but you did say earlier in this press conference that the recent inflation data hasn't raised confidence but when you testified before the senate a couple weeks ago you told lawmakers you are not far from cutting rates. Are you still in that belief or not? What are we to take by those words? Not far. >> My main message in those days is that the committee needs to maintain confidence and we don't expect it will be appropriate to begin to reduce rates until we're more confident than that. I said that any number of times. Those are the main part of the message we repeated today in that statement. To the language you mentioned, I really pointed out that we had made significant progress over the past year and what we're looking for was confirmation that that progress will continue. We had a series of inflation readings over the second half of last year that were really much lower. We didn't over-react as I mentioned. But that is what I had in mind.
(5) FOMC Press Conference Transcript 3/20/24
CHAIRPERSON: It certainly hasn't raised anyone's confidence, but I would say that the story is really essentially the same. And that is of inflation coming down gradually toward 2% on a sometimes-bumpy path as I mentioned. I think that is what you still see. We've got 9 months of 2.5% inflation now. We've had 2 months of bumpy inflation. It's going to be a bumpy ride. We've consistently said that. Now we have bumps. We can't know that. That is why we are approaching this question carefully. It is very important for everyone that we serve that we do get inflation sustainably down. Every situation is different but the historical record is you need to approach that carefully and not have to come back and raise rates again if you cut it prematurely.
(6) FOMC Press Conference Transcript 3/20/24
At this meeting we discussed issues related to slowing the pace of decline in our securities holdings. While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon. Consistent with the plans we proefsly issued. The decision to slow the pace of run-off does not mean our balance sheet will shrink but allows us to approach that ultimate level more gradually. In particular, slowing the pace of run-off will help ensure the transition reducing the possibility of money markets and facilitating the ongoing decline in security holdings, increasing the ample reserves.
(7) Bloomberg 3/20/24
Short-maturity Treasuries jumped after Federal Reserve policymakers stuck with their forecast for three quarter-point interest-rate cuts this year, putting to rest market concern that the central bank would crimp plans to ease monetary policy.
Yields on two-year debt briefly declined to session lows after the Fed’s policy announcement Wednesday, and traders now see about 77 basis points of cuts this year, up from 73 before the release. Policy makers’ revised rate forecasts showed a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future.
Ivestor's Business Daily 3/20/24
Major indexes soared in late afternoon trades Wednesday after the Federal Reserve held rates steady and indicated three rate cuts still are on tap for this year.
After hugging break-even territory much of the day, the Dow Jones Industrial Average surged nearly 400 points or 1% in late afternoon trades. The S&P 500 climbed 0.9% on the stock market today. Among S&P sectors, health care lagged but others gained. The Nasdaq gained 1.2% in the wake of the Fed meeting.
