FOMC Holds Rates As Expected, Dot-Plot Shifts More Hawkish In 2024

Tl;dr: there were 10 Fed members who saw rates at 4.625% or below by end 2024 in March… now there are none…

June Dots summary:

• No Cuts: 4 (2 in March)

• 1 Cut: 7 (2 in March)

• 2 Cuts: 8 (5 in March)

• 3 Cuts: 0 (9 in March)

• 4 Cuts: 0 (1 in March)

The Fed re-arranged 2024-2025 dots from 2+3 to 1+4, and marked-to market their Core PCE forecast for year-end – signaling they are just being extra careful, and want some more evidence before committing to a cut.

⚠️ Whether or not dots were revised post-CPI… the takeaways are: (1) FOMC agree ’24 will see 1 or 2 cuts; (2) wide range of views on how policy plays out after this; (3) but overall dots have shifted up; (4) two schools of thought on R* (some higher vs. others no change) $USD pic.twitter.com/1yPNtOCk9q

— Viraj Patel (@VPatelFX) June 12, 2024

Additionally, The Fed increased its end-2024 expectations for inflation…but kept its unemployment expectations unchanged…

There were no dissents today.

This is not what the market was looking for… but will Powell reverse this in the presser.

*  *  *

Since the last FOMC statement (on May 1st), stocks and bonds have outperformed (with the former at record highs), gold is flat while the dollar is down modestly. Amid all that, oil is down significantly…

Source: Bloomberg

These market moves have been prompted by a 'bad news is good news’ regime as US macro data has serially disappointed…

Source: Bloomberg

…adding significantly to hopes for a more dovish Fed (2 cuts priced in for 2024 and an additional 92bps of cuts in 2025)…

Source: Bloomberg

The good news is that while growth 'surprises’ have slipped lower, inflation 'surprises’ have also drifted lower after four months of stagflationary signals worrying markets…

Source: Bloomberg

Today we also get to see a new DotPlot, which is expected to show and adjustment down from three to two cuts for 2024 (with a risk to an adjustment down to just one cut)…

Source: Bloomberg

Of course, as a reminder, the global backdrop for today’s Fed decision is that big US trading partners, like Canada and the euro area, have cut interest rates even as inflation remains an issue.

So, What Did The Fed Do?

The Fed held rates unchanged as expected…

*FED HOLDS BENCHMARK RATE IN 5.25-5.5% TARGET RANGE

And changed wording on inflation (from a „lack” of progress):

*FED: INFLATION MADE MODEST FURTHER PROGRESS IN RECENT MONTHS

BUT…

The dot-plot was hawkish, adjust to just one 25bps cut in 2024 (and four 25bps cuts in 2025)

*FOMC MEDIAN FORECAST SHOWS 25 BPS RATE CUTS IN ’24 VS 75 BPS

*FOMC MEDIAN FORECAST SHOWS 100 BPS RATE CUTS IN ’25 VS 75 BPS

There is another notable development: The longer-run estimate of the federal funds rate has gone up to 2.8% now, in the median forecast. That’s the second straight increase. Last time it had ticked up to 2.6% from 2.5%.

So, in six months, policymakers have added more than a quarter percentage point to where they see the benchmark rate over the longer haul — the so-called neutral rate.

Additionally, The Fed increased its end-2024 expectations for inflation…but kept its unemployment expectations unchanged…

There were no dissents today, extending the streak of zero votes against the FOMC policy decision to 16 meetings, the longest period of no dissents since Alan Greenspan’s 17-meeting streak from August 2003 to September 2005 – when Mark Olson dissented.

Read the full redline below (barely changed):