U.S. Desk Strategy Market Views

Final FOMC meeting for 2023 surprises on the dovish side…

The FOMC kept the Fed Funds rate steady again at the 5.25-5.5% target range, making this the fourth skip of this rate cycle. Given the Fed’s open admission that the next natural question to discuss is “when will it be appropriate to cut”, not only is the Fed done, they are now pivoting towards when to ease. The SEP interest rate dots had an additional 2 cuts in 2024 (given that they did not hike at this meeting), bringing the median down to 4.63% from the current 5.38% median, which suggests a total of 75bps of cuts next year.

Chair Powell’s PSA at the start of the press conference continued to focus on getting inflation back to the Fed’s 2% target. There was a scripted paragraph in the PSA about how the rate paths submitted in the SEP are not meant to be forecasts, but in general the presser was dovish. Powell had the opportunity in the Q&A (at various occasions) to push-back on the recent easing of financial conditions but stated “there can be back and forth in financial conditions.”

Given the Fedspeak ahead of the blackout, along with recent economic data coming in better than expected, we were not expecting FOMC participants to signal a dovish message via the dots. We also thought chair Powell would push back against the recent easing of financial conditions. In the last meeting they were pleased that markets were tightening for them. But since November 1st, all markets have eased conditions, unwinding Fed tightening even further. Net, we clearly miscalculated the Fed’s willingness to convey a hawkish message. This begs the question; do they know something that we do not know?