Notes From The Desk: FOMC Meeting – A Hawkish Pause
The FOMC chose to exercise patience today by holding rates steady but raised the terminal rate’s median projection to 5.6%, indicating the need for 50bps of hikes in the coming months.
Connecting the dots.
The infamous dot plot revealed the following projections.
- Terminal rate of 5.6%.
- Fed Funds rate to fall 100bps in 2024 to finish at 4.6%.
- Rate to fall an additional 125bps in 2025.
- The long-run Fed Funds rate remains at 2.5%.
Other projections.
- 2023 GDP revised higher to 1% from 0.4%.
- Unemployment rate to reach 4.1% instead of 4.5% by the end of the year.
- PCE inflation (the Fed’s preferred measure) to reach 2.1% by the end of 2025.
The implications.
This is the first FOMC meeting in a long time that hasn’t resulted in violent moves in rates.
- The Fed surprised markets by laying the groundwork for an additional 50bps of hikes this year.
- This is projected to be followed by 2.25% worth of cuts in 2024 and 2025.
- The balance between more hikes and the path of cuts led to a muted reaction, with US 2y yields up a handful of basis points and the 10y marginally lower.
Our conclusion is that market participants are comfortable that current yields reflect the likely path of monetary policy.
