After the November inflation test, the markets are now bracing for an even tougher challenge from the Federal Reserve, which is set to announce its interest rate decision this Wednesday at 2 p.m. ET, followed by Fed Chair Jerome Powell‘s press conference at 2:30 p.m. ET.
Although the hiking cycle has almost certainly concluded with rates expected to stabilize between 5.25%-5.50%, this final meeting of the year is pivotal as investors closely monitor the central bank’s outlook on monetary policy.
End of the Hiking Cycle and Market Expectations: The current consensus suggests the Federal Reserve’s rate-hiking cycle has reached its peak, with expectations for rates to settle in the 5.25%-5.50% range. However, the significance of this meeting extends far beyond the immediate rate decision. Investors are eagerly anticipating insights into the Fed’s perspective on the future of monetary policy.
FOMC’s Economic Projections in Focus: A critical element of the upcoming announcement is the Federal Open Market Committee’s (FOMC) new economic projections. These forecasts, covering inflation, growth, and the trajectory of interest rates through 2024, 2025, 2026 and the long term, will provide valuable indicators of the Fed’s economic outlook. The Fed’s September forecasts placed the Personal Consumption Expenditure (PCE) index at 2.5% in 2024, decreasing to 2.2% in 2025 and reaching the 2% target by 2026. Economic expansion was projected at 1.5% in 2024, followed by 1.8% in the subsequent years.
The Crucial “Dot Plot”: The “dot plot,” a graphical representation of each board member’s interest rate expectations, will be under intense scrutiny. Although not a formal commitment, the dot plot is a vital tool for understanding potential future scenarios and how they align with or diverge from market expectations.
Revisiting September’s Projections vs. Market Reality: The divergence between the Fed’s previous projections and current market pricing is striking. September’s dot plot indicated a median rate of 5.6% by the end of 2023, a figure that has not materialized. For the end of 2024, the plot showed a 50-basis-point reduction to 5.1%, while market pricing now suggests significant cuts, leading to a rate between 4% and 4.25%. If the Fed sticks with the 50 basis points of cuts projected for 2024, as indicated in September’s dot plot, the median dot would be at 4.9%.
September’s Fed Summary Of Economic Projections
| Economic Indicator | September 2023 Projection | June 2023 Projection |
|---|---|---|
| Change in Real GDP (%) | ||
| 2023 | 2.1 | 1.0 |
| 2024 | 1.5 | 1.1 |
| 2025 | 1.8 | 1.8 |
| 2026 | 1.8 | – |
| Unemployment Rate (%) | ||
| 2023 | 3.8 | 4.1 |
| 2024 | 4.1 | 4.5 |
| 2025 | 4.1 | 4.5 |
| 2026 | 4.0 | – |
| PCE Inflation (%) | ||
| 2023 | 3.3 | 3.2 |
| 2024 | 2.5 | 2.5 |
| 2025 | 2.2 | 2.1 |
| 2026 | 2.0 | – |
| Core PCE Inflation (%) | ||
| 2023 | 3.7 | 3.9 |
| 2024 | 2.6 | 2.6 |
| 2025 | 2.3 | 2.2 |
| 2026 | 2.0 | – |
| Projected Appropriate Policy Path: Federal Funds Rate (%) | ||
| 2023 | 5.6 | 5.6 |
| 2024 | 5.1 | 4.6 |
| 2025 | 3.9 | 3.4 |
| 2026 | 2.9 |
Source: Federal ReserveThe projections for the federal funds rate are based on the median of participants’ assessments of appropriate monetary policy. These projections represent the participants’ views of the most likely outcomes for each variable.
Interpreting the Dot Plot: Hawkish vs. Dovish Stances: Market News (MNI) analysis suggests any median dot projection above 4.9% for 2024, such as maintaining a 5.1% rate, would be interpreted as a hawkish stance by the market. Conversely, a median cut of 75 basis points or more, lowering the rate to 4.6% or below, would be seen as dovish. The general expectation is for the dot plot to counter market expectations for significant cuts next year, with a few members advocating for minimal or no cuts.
Recent Financial And Macro Developments: Since the Nov. 1 FOMC meeting, the 10-year Treasury yield has fallen by nearly 80 basis points, signaling a relaxation in financial conditions. Long-term bonds have rallied, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) up 12%, reflecting a broader market conviction for lower interest rates in the upcoming year. Meanwhile, the latest job report indicated stronger-than-expected growth, and inflation figures remained broadly in line with annual projections, albeit slightly higher in the monthly headline rate.
Fed’s Anticipated Approach: Given these developments, the Fed appears poised to adopt a “wait and see” approach, seeking further data before committing to future policy changes. This cautious stance is expected to be reflected in Powell’s press conference, where he is likely to emphasize the need for patience and caution against premature conclusions about the central bank’s policies.
Read Now: Economists React To November Inflation Numbers: What Lies Beneath the Surface For the Fed?
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