Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FOMC: A hawkish cut wraps up 2024 for the Fed
John J. Hardy
Chief Macro Strategist
Summary: The Fed waxed a bit more hawkish than the market anticipated, although it only brought its “dot-plot” forecasts of the 2025 Fed funds rate to where the market had already taken it before the meeting.
The initial reaction to today’s FOMC meeting was that the Fed has delivered a “hawkish cut” as it cut rates 25 basis points to 4.25%-4.50% (with one hawkish dissenter, Cleveland Fed president Hammack) and took its forecasts for the path of Fed Funds rates sharply higher relative to the September projections, likely on the unanticipated relative firmness of the labor market and resurgent core inflation. The new median “dot plot” forecasts for the Fed Funds rate by end of the end of 2025 was shifted up to 3.9% from 3.4% in September, within a couple of basis points of where the market is pricing the rate, and the median Fed forecast for 2026 were brought up to 3.4% from 2.9% (the market even higher at 3.9%, it should be noted).
Initial thoughts on market reaction: the fact that the US dollar and US treasury yields rose so sharply (2-year US Treasury benchmark up about 6 basis points just ahead of the Fed Chair Powell press conference) in the wake of the release of the almost entirely unchanged policy statement and the new batch of staff economic projections suggests that the market is surprised that the Fed would meet it so quickly at its own projections for where Fed policy will be next year (perhaps only anticipating the Fed was only willing to remove one rate cut from next year in the projections, and with more dispersion in the forecasts.) It might also be the recognition that if the Fed is so willing to move in line with market expectations, that it will simply react to unfolding reality in a Trump 2.0 administration, flying by the seat of its pants to whatever develops, meaning that Fed forward guidance is an increasingly cheap commodity and the market can safely make its own assumptions about how things will shape up in the coming months.
In the other staff economic projections (SEP), one can see the justification for the Fed’s more hawkish shift in its policy forecast, as it slightly lowered the anticipated unemployment rate rise for this year to 4.2% vs. 4.4% previously and for 2025 to 4.3% from 4.4% previously , but more pointedly raised the core inflation projections for this year relative to the September projections (2.8% vs. 2.6%), for 2025 (2.5% vs. 2.2%) and 2026 (2.2% vs. 2.0%) while keeping the long term projection steady at 2.0%.
Table: December FOMC Staff Economic and Fed Funds rate projections.
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