It is widely believed the FOMC will not deliver any interest rate surprises today: Officials have amply signaled that there will not be any further increase this time around.
The Committee will also update the Summary of Economic Projections, which lays out how they expect growth, inflation, and unemployment to develop given appropriate monetary policy.
In many regards the infamous dot plot has been talked down by Fed officials, hence suggesting one should not read too much into such forecasts given that they been very wrong in the past.
Two years ago, the median projection was for the Federal Funds rate to end 2023 at 1%. Eighteen months ago, “transitory” entered the lexicon. Nine months ago, it was projected the economy would be near or in a recession.
In June, the median forecast anticipated 100 basis points of cuts in 2024 and another 120 bps in 2025. The message was that as inflation fell, the federal funds rate would follow it down.
If officials are leaning toward “higher for longer,” the projected rate cuts should become smaller.
What is the neutral Federal Funds rate, the rate that neither stokes nor damps growth? In June the median estimated was unchanged at an inflation adjusted rate of 0.5%. The much maligned but still significant central tendency projection moved higher to 0.5% to 0.8% from 0.4% to 0.5%.
If the neutral rate is increased, longer dated Treasuries must be repriced.
The overnight rate is at the highest level since 2001. The five-year and ten-year Treasury are at the highest yield since 2007.
These developments have surprised most including the Federal Reserve, the organization that is regarded as the most highly staffed and educated economic think tank in the world, an organization that can influence markets and economies.
The environment is radically changing, where the velocity of such change is frightening. Trade has been weaponized. Deficits are gargantuan whose interest coverage has risen exponentially. QE became QT in a span of several months. Virtue signaling has replaced economic rationality.
Changing topics, both the Treasury and equity markets declined yesterday ahead of the outcome of the Fed meeting. “peak” interest rates are now shifting from November to December, partially the result of rising crude prices.
How will the FOMC statement impact this view?
Last night the foreign markets were mixed. London was up 0.77%, Paris up 0.37% and Frankfurt up 0.56%. China was down 0.52%, Japan down 0.66% and Hang Seng down 0.62%.
Futures are flat. The 10-year is up 5/32 to yield 4.34%.
