'Twas The Night Before Fed Day
A preview of Wednesday's FOMC meeting and the possible paths for assets and the economy in 2024.
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With the first FOMC meeting of 2024 set for tomorrow to close out January, let’s take a look at what the market expects, how the Fed and Treasury are bracing for it, and how assets and the economy will respond in the months to come.
Fed Funds futures signals that it expects rates to fall somewhere between 25 and 50 basis points by the May meeting:
Here’s a chart of how cut expectations have changed over time. Cuts were barely priced into the market just four months ago, but now there is an absolute certainty in Fed Funds futures that the Fed will cut by June, bringing the upper bound on the main policy rate to 5%:
Here’s the evolution of the expected path for Fed Funds—dovish in July, very dovish in October, and full about-face over the past 3 months as Powell and crew have let slip their rate cut intentions for 2024. We think it’s very important to note the small but essential difference between today and the curves from July and October’—each one of the red and purple curves started with still modest hikes being priced in, while today’s curve in white basically starts with a drop: