Printer is Coming

In the game of interest rates, a picture is worth a thousand words and Jerome Powell's dot plot stole the spotlight this morning. The adjustment of the dot plot aligns more closely with market expectations, essentially endorsing it rather than resisting the market's anticipation of 114 basis points in easing next year. The Fed revised the 2024 dot to 4.6% from 5.1%, indicating a 50 basis points easing.

However, the market is currently pricing in 127 basis points easing. This apparent discrepancy is a result of an ongoing dynamic between the Fed and the market. The market tends to be more aggressive and call the Fed's bluffs, and while the Fed sometimes weighs in to correct the market (as it has been most of the year), the recent alignment with the market signals an acknowledgment that the market is moving in the right direction.

Does this mean that restrictive policy is over and the Fed will just give in and create easy money again? Not immediately, but it shows that it will almost certainly come sooner than they stated and investors had legitimate reason to doubt the Fed.

The effects of this mornings FOMC:

• A sharp fall in the US Dollar: The anticipation of more money creation happening sooner than expected means investors raced to pull out of USD before much greater devaluation occurs
• Another rise in major indices: Increased liquidity allows for more money to flow to investments.
• Gold halted its dip and started to rise: Gold has had a dip after reaching all-time-highs, but this news has so far stopped the dip in its tracks. The money supply increasing and therefore devaluing the currency makes gold an attractive hedge. Gold has since risen sharply this morning:

Here are the other key takeaways from the FOMC Statement:

Economic Activity and Employment:

• Recent indicators suggest a slowdown in economic activity from the strong pace observed in the third quarter (this is another reason to pivot sooner).
• Job gains have moderated but remain strong, and the unemployment rate is low.

Inflation:

• Inflation has eased over the past year but remains elevated.
• The Committee is highly attentive to inflation risks.

Financial System:

• The U.S. banking system is deemed sound and resilient (This seems to be in every statement this year).
• Tighter financial and credit conditions for households and businesses may impact economic activity, hiring, and inflation, but the extent of these effects is uncertain.

Monetary Policy Goals:

• The Committee aims to achieve maximum employment and inflation at a rate of 2 percent over the longer run.

Current Policy and Targets:

• The target range for the federal funds rate is maintained at 5-1/4 to 5-1/2 percent.
• The Committee will continue assessing additional information and its implications for monetary policy.

Policy Considerations:

• The Committee will consider the cumulative tightening of monetary policy, the time lags in policy effects, and economic and financial developments in determining any additional policy firming.
• Reduction of holdings of Treasury securities and agency debt and mortgage-backed securities will continue.

Commitment to Inflation Target:

• The Committee is strongly committed to returning inflation to its 2 percent objective.

Monitoring and Adjustments:

• The Committee will continuously monitor incoming information, including labor market conditions, inflation pressures, expectations, and international developments.
• Adjustments to the monetary policy stance will be considered if risks emerge that could hinder the Committee's goals.

Be sure to catch Insights this afternoon where Chris will be joined by Sam to break down all this and more along with some discussion around the implications we can expect for the markets as we move rapidly towards 2024!