The Fed isn’t cutting rates today, but the real action is in the Dot Plot, Powell’s press conference, and whispers of QT slowdown. Here’s what matters.
KEY TAKEAWAYS
MY HOT TAKES
And, ‘dots’ a wrap! No. Nope. Not gonna’ happen. At least, highly unlikely to happen. Like an 0.8% chance, as in less than a 1% chance of a rate cut today. At least according to the futures market and most experts. So, you may be asking yourself, “why even bother paying attention to it then?”
I get it. A rate cut would feel pretty good right about now, and given that it would be completely unexpected, it is likely to cause markets to leap higher. Again, who wouldn’t want that? Well, to answer the question above, today’s intrigue is less about the Fed Funds rate, and more about the Fed Funds rate in May or June. The FOMC gets April off. 🫤
Yes, a lot of folks, perhaps more than usual, will be holding onto Powell’s every answer in his press conference after the announcement. In fact, this is where all the action typically occurs. Will he hint of willingness to continue easing? Will he double down and tell us that the economy is healthy and that the Fed will be on hold literally until the FOMC meeting after inflation hits 2%? Worse yet, will the Chairman hint that tariffs are inflationary and that the FOMC is worried about inflation, implying that the Fed could possibly RAISE interest rates in the future. Or all the above. 🤣
Beyond all the chatter that we are about to get inundated with, there is something we can actually print out, read, and analyze. That would be the Fed’s quarterly Summary of Economic Projections (SEP) report, due to be released today. We get to see where each FOMC member is projecting the Fed Funds rate to be in each of the next four Decembers, visualized on their infamous Dot Plot. Also projected are the unemployment rate, inflation rate, and GDP. That’s right, each of the members submit their projections and then publish the descriptive statistics of the distribution, but everyone only cares about the medians.
So, let’s talk about those medians for a moment… or two. Starting with the Fed Funds Rate, because, strangely, everyone is still so obsessed with it. In December, the FOMC was projecting Fed Funds to be 3.9%, which it upped from the prior meeting. For some reference, Fed Funds Futures are expecting it to be around 25 basis points lower (3.75%) than the Fed’s last projection. Today’s projection is likely to be around the same number, but the range of samples may narrow. This is more likely to surprise on the downside than upside. On GDP, December’s median was tweaked up slightly to 2.1%. It is possible that the FOMC keeps that the same, despite emerging worries that consumption is pulling back a bit; the logic behind leaving it unchanged is to project stability. The bias however is on the downside based on headwinds caused by trade entanglements. Moving on to inflation, there is a good chance that the FOMC will tick this one slightly higher based on tariff expectations, despite recent larger-than-expected declines. Finally, the unemployment rate, which the FOMC projected to be 4.3% (down from 4.4%), may be revised higher yet today, as a result of recent Government layoffs as well as a rising number of private sector cuts.
So, to sum up, there is a chance that the FOMC will lower its forecast for economic growth while raising its forecast for inflation. That’s um… stagflation. How will the market react to that? Well, it can only be good if the body implies more and sooner rate cuts, which is not likely. The only justification would come if the big Bank were expecting unemployment to tick up meaningfully, which would be, sadly, viewed as a positive to the rate-cut-addicted.
There is something else that we will be looking for today. I told Bloomberg the other day that recent market action had less to do with actual tariffs and more to do with the unknowns and confusion coming out of DC… um, the executive branch. That said, I told the reporter that the markets were looking to Powell to be a “father figure” of sorts, exhibiting confidence, conviction, and stability. And these days, that can go a long way to salve the exposed nerves of investors.
There is one final wildcard to look for in today’s meeting and press release. One which is hardly ever talked about these days: quantitative tightening. The Fed does this by removing money from the economy, which is practically accomplished by either selling bonds from its “balance sheet,” or by letting those bonds mature without being replaced. It’s the opposite of quantitative easing, or QE, which was popularized in the wake of the Global Financial Crisis. In other words, it is restrictive, just like higher Fed Funds rates.
There are whispers on the street that the Fed may be considering slowing down its balance sheet runoff in response to recent policy moves by the Administration. If the Fed does pull back on QT, it would be viewed positively by markets, as it is technically monetary easing, albeit light. However, it must be made clear that removing brakes is not the same thing as pushing on the gas. Similarly with the Fed Funds rate, which is restrictive at current. If the Fed cuts rates by just a little, they are still restrictive, just a bit less restrictive. I know that this all seems like semantics, but positive semantics are what the market needs right now. A little positive reassurance wouldn’t hurt either.
YESTERDAY’S MARKETS
Stocks swooned yesterday as investors could still not just allow fears to dissipate. Housing numbers came in mixed with a surge in housing starts backed by a slight dip in permits. Meanwhile Industrial Production got a leg up last month as factories picked up the pace to beat the arrival of fresh tariffs.
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