This FOMC meeting requires looking through an evenly split scenarios window. Overall, the highlight of the May FOMC meeting will likely be the tapering of QT. We believe the Fed wants to keep QT ongoing for longer rather than abruptly stopping. This would require a 2-step process, first the QT taper and second, a shift in balance-sheet (b/s) composition. We envision the Fed will reduce the pace of QT to a slower run-rate (a stepdown toward half of the $95bn per month, eventually to zero QT) and we believe the Fed will use MBS and UST proceeds toward more short-term USTs as auction add-ons. Over time Fed would start growing its b/s again.
May FOMC Scenarios
|
Scenario |
Probability |
Assessment |
|
Very Hawkish Hold |
15% |
|
|
Slightly Hawkish Hold |
35% |
|
|
Base-Case: Neutral Hold |
35% |
|
|
Dovish Hold |
15% |
|
Future Rate Cuts for the Balance of 2024
Given the growing underlying cracks in the jobs data, the burden of higher nominal and real rates is having on the margin (for lower-income households, small businesses, CRE/Banks, even larger corporates in high yield), it’s only a matter of time before US macro conditions worsen, in our view. As such, our base case is for 100-125bps cuts in 2024, concentrated in the 2nd half. We have pushed back our 1st cut to July, and it would be a down-payment on easing cycle (Scenario 2&3), allowing them to gauge data in the summer and avoid the 1st cut so close to the election. We also assume Q2 data softens and risk assets rollover, giving them a green light to cut. They may skip September too, but given our outlook, if they skip meetings, subsequent cuts may need to come as -50bp clips as the economy decelerates into end of year/early 2025.
Please see the link above for the PDF with macro and market charts and scenarios table…
