FOMC: Hail Powell the Dexterous
We run through the dot plot mix and Powell statements.
The focus during these FOMC “Gang of 19” dot plots usually comes down to counting how many at each rate expectation, how wide the range, and the final median of the group.
After the last forecast of Sept 2023, the ceiling fed funds forecast for 2024 was a lofty 6.125% and a floor of 4.375%, but this meeting shows a high of 5.5% upper target by the end of 2024 and 5 of 19 votes for 100 bps or more of cuts in 2024.
The June 2023 projection for the year end 2024 fed funds rate was 4.6% but was bumped up to 5.1% in the Sept 2023 projections ahead of being knocked back to 4.6% in these Dec 13, 2023 projections as released today.
Powell made it clear that inflation trends have gone well, but labor resilience was a topic as one of the surprises this past year.
The market got a lot of what it wanted in the press release and projections in that 17 of 19 see cuts next year. We see the Dow at an all-time high as we go to print with equities broadly higher. The UST market liked the dovish tone from Powell in the follow-up conference and Q&A. The focus on the word “any” when attached to “additional policy firming” got a lot of airtime on cable and in Powell’s Q&A.
The dot plot can be perplexing as it moves around, and the presentation of the numbers round to the estimate of the midpoint between the Hi-Lo band (the nearest 1/8). My brain works better citing the upper end of the range, and the upper end of 5.5% is my reference point on the math of the cuts.
The range of midpoints were pretty wide with 5 of the 19 projecting 5.0% upper target by year end 2024 (50 bps lower than current) and 6 projecting 4.75% upper range (75 bps lower than current). That 4.75% to 5.0% cluster on the upper end of the target was the main concentration. We see another 4 of the 19 at 4.5% upper range (down 100 bps from current).
The High end of the range for 2024 was for “unchanged” in fed funds at 5.5% upper with two of the 19 at that level and another 1 of the 19 at a 5.25% upper target. The low end for 2024 was 1 of 19 at 4.0% rate for the Low end of the target range.
When we were last with our FOMC dots in late September (see FOMC: Higher for Longer, Confused for Shorter 9-20-23), the theme was “higher for longer” and a majority of the group (12 of 19) were showing one more hike in 2023 vs. 7 indicating no changes through the end of the year. That group of 7 seeing zero hikes for the rest of 2023 were on the mark. The FOMC collectively had not ruled out another hike.
Since the last meeting in Sept 2023, the tone across the recurring “speechifying” by Fed leaders has shown plenty of division even if the overwhelming consensus in the UST market pricing had been for no more hikes for 2023. At this point, the market and more than a few brand name street leaders are expecting easing by March. The futures market is showing a wave of cuts in 2024 then more across the year.
The day started with a PPI that was favorable for the inflation story after a CPI release yesterday that was – at best – neutral for the easing story line (see November CPI: The Big 5 and Add-Ons 12-12-23). PCE as the favored inflation indicator was supportive of the lower inflation theme to end last month (see PCE Prices, Consumption, Savings: Good News is Less News 11-30-23) with the updated PCE release teed up for the end of next week.
Later this week we will see Retail Sales and Industrial Production for some more inputs ahead of PCE next week. The backward-looking indicators have not shown contraction risk on the rise and certainly not signs of a hard landing. ISM and manufacturing have been mixed to negative for a year in historical context, but not much more from other quarters.
The years 2025 and 2026 seem a long way off, but the target median for fed funds was for 3.6% fed funds to end 2025 and 2.9% fed funds for 2026. We see a wide dot plot range in 2025 from a 5.5% upper target on the high side to a 2.5% upper on the low side. The median estimates for 2025-2026 would fit into the framework of positive real fed funds with a PCE long term target of 2.0%.
Getting to positive real fed funds net of PCE took a while to get realized in this tightening cycle (see Fed Funds vs. PCE Price Index: What is Normal? 10-31-22). The median PCE inflation estimate of 2.0% is not reached in the forecasts until 2026 with the 2025 median for PCE prices near the target at 2.1%.
There are still a lot of economic indicators and sea level fundamentals to play out in the economy in 2024. That will unfold in a bitter election year that distorts (undermines? derails?) policy actions on the fiscal side while promoting caution on the monetary side (which of course the Fed would never admit). It will be a grind.